Romain Miginiac, CFA

UBS reported very strong results in the 4th quarter of 2020, making 2020 a standout year for the bank. With a return on tangible equity of c13% (on a $6.6bn net income) for 2020 and an excess capital position of $12bn, UBS has ticked all the right boxes for both equity and bondholders. UBS’ business model is fairly unique, now mainly focused on wealth and asset management (around 60% of pre-tax profits) with a refocused investment bank (around 27% of pre-tax pr

ofits) and domestic retail/commercial banking operations (13% of pre-tax profits). The fee-driven asset/wealth management provides very stable retur

ns and makes UBS significantly less vulnerable to low rates compared to European peers. In 2020, beyond the stability of wealth and asset management operations, UBS’ Corporate and Investment Banking (CIB) operations also benefitted from high market volatility and a large issuance of corporate bonds – leading to outsized returns. Compared with other European banks, asset quality has not been a material issue and its lending book is mainly comprised of secured Lombard loans (lending to wealthy customers secured against invested assets) or low LTV (loan-to-value) swiss mortgages secured against residential property. Overall the group has set aside c$1.2bn of provisions for the year (0.19% of total loans) compared to an estimated 0.8% for the wider banking sector – fairly limited.

As 2020 has been a real life stress test for the European banking sector, UBS resilience to a severe macro shock is extremely positive for bondholders. In a nutshell, during 2020 has generated higher earnings than in previous years and strengthened its capital position, resulting in improved buffers to absorb losses for bondholders. Given the bank’s unique business model and resilience we see the bank’s subordinated debt (offering around 3.8% yield or c330bps spread) as very attractive in the context of the banks’ rock solid fundamentals.

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