Investment Banking - Research Paper Example

?Finance: Investment Banking Table of Contents Table of Contents 2 Company Overview 3 Major products and services 4 Analysis of the Income ment & Balance Sheet 5 Computation of ratios 9 Tier 1 & Tier 2 Capital 15 Key Competitors 16 Analysis of business news 17 Conclusion 18 Reference 19 Bibliography 21 Annexure 22 Company Overview UBS is a financial services company with a global presence offering a wide variety of financial services to the global businesses and private clients. The services offered by the bank are reflective of the worldwide financial markets. UBS has set offices in all the prominent financial hubs. This includes United States, South America, Canada, Switzerland, Middle East, Europe, Africa and Asia. The customers can choose from a wide range of products of the company such as stocks, annuities, 401K plans, fund management, mutual funds, asset management, health & life insurance schemes and trust funds. In short the company provides all the services that one wants to avail with respect to the financial world. UBS also operates a “sophisticated online business” which enables the customers to input operations. In case a customer seeks an expert advice he can avail the services of a financial advisor who could assist him in developing an investment portfolio. In other words an individual can make use of the best brains in company to make financial gains (WordPress, 2011). UBS ranks among the leading financial services firms in the world. In terms of market capitalization the bank is the sixth largest with worldwide staff strength of 65000. The company is fairly young. The merger of two Swiss banks in the year 1998 led to formation of UBS. Over the years the bank has transformed itself into an international firm with important market positions in Europe, Asia, US. Despite the dominant presence of retail in Swiss market the staff strength of the bank is higher in America. Most of this growth has been achieved by the bank through mergers and acquisitions deals. The acquisition process culminated in the year 2000 with the acquisition of PaineWebber. The brand portfolio of the bank is a byproduct of tradition and acquisitions and not due to an evaluation of its weaknesses and strengths of various properties. With time the bank has established itself as a leader in various business segments and works towards offering a customer experience that is highly valued by the clients across all business lines (Thirkell-White, 2004). Major products and services Wealth Management & Swiss Bank concentrates on the delivery of comprehensive finance related services to HNIs and ultra HNIs and corporate as well as private clients in Switzerland across the globe barring those catered by the Wealth Management Americas. The unit caters to the needs of clients in more than 40 countries by offering financial advice relating to various tools and products that suits their needs. Global Asset Management wing of the bank is a large-sized asset manager that has businesses across various regions, distribution channels and capabilities. It provides investment styles and capabilities ranging from equities, currency, fixed income, hedge fund, infrastructure and real estate. The fund services division offers accounting, legal fund set up and reporting for institutional and retail funds. Wealth Management Americas has a group of financial advisors offering advice based services through an integrated base of services and products that are specifically developed and designed to meet the requirements of HNIs and ultra HNIs and some core affluent families and individuals. Investment Bank offers financial products and securities. The research of the unit ranges across equities, rates, fixed incomes, precious metals and foreign exchange. It also offers advisory services besides giving access to the worldwide capital markets to institutional and corporate clients, financial intermediaries, governments and private investors (UBS, 2011). Analysis of the Income Statement & Balance Sheet There have been a number of changes in the financial position of the bank over the last three years. This is mainly on account of the recent financial crisis. The recent credit turmoil sent ripples across the worldwide financial markets. The situation turned panicky for the financial institutions after the collapse of the Wall Street giant Lehman Brothers. The rising delinquency of the sub-prime mortgage borrowers led to a fall in the worldwide equities. The situation was further worsened as the derivative products on the housing mortgages like credit default swaps was not restricted to US, which is touted as the country where crisis originated. A number of investment banks had initiated a position in these financial instruments which is the main reason for the spread of the credit crisis. The fall of the one time financial giant aggravated the situation. Many of the financial institutions were rescued by government stimulus packages. In this scenario the banks became wary of lending to each other. This seems to be the main reason for the deteriorating financial health of UBS as is reflected from the last three years financial statements. In the year 2008 the Cash and balances with Central banks of UBS increased substantially from CHF 18793 million in 2007 to CHF 32744 million in 2008. It signifies a rise of 74%. However in the financial year 2009 this amount fell to CHF 20899 million i.e. by nearly 36%. This amount represents the non-earning assets that the bank maintains in order to avoid any misappropriation of funds. A fall in this asset over the related period is indicative of the limited cash availability of the bank on account of its failure in garnering sufficient deposits from the wary customers. The amount relating to Due from banks increased from CHF 60907 million in 2007 to CHF 64451 million implying an increase, albeit marginal, of 6%. But this amount fell drastically in 2009 to CHF46574 million which is a fall of 28%. This is mainly because there was a fall in the transaction between the banks. Perturbed by the fall of prominent financial institutions the banks became wary of lending to each other resulting in a fall in the amount lend out to each other. The value of the Trading portfolio assts was CHF 660182 million in 2007. This fell by 59% in the next financial year to reach CHF 271838 million. In the next financial year there was a further decline of 31% in this asset as it reached CHF 188037 million. This shows that this asset reduced by more than one third in a span of three years. For 2007 the banks gave out loans of CHF 335864 million. This increased even though marginally to CHF 340308 million in the next year. But in the immediately next financial year the amount of loans disbursed by the bank fell by 15% to CHF 306828 million. Over the last three years there was a sharp decline in the amount of investment made by the bank in its associates. This amount was CHF 1979 million in 2007 and it fell by nearly 55% in the next year to CHF 892 million. The fall was not restricted to these two years as it again fell by 2% to reach CHF 870 million in 2009. In the last three years the bank has invested heavily in the “Financial assets”. This is evident from the successive rise in this asset over the last three years. In the financial year 2008 the amount of this asset increased by 6% to reach CHF 5248 million in 2008. Again in the next financial year i.e. 2009 the amount of this asset increased by phenomenally to reach CHF 81,757 million. The overall asset position of UBS has declined over the last three years. The amount of total assets reported by the bank in 2007 was CHF 2274891 million which decreased by 11% to reach CHF 2014815 million in the following year. However, the bank could not restrict this fall to 2008 as again in 2009 the total assets fell by 33% to CHF 1340538 million. This shows that the asset position of the bank nearly halved over the last three years. This was mainly on account of the rising loan delinquencies, cautious attitude and grim market conditions that gripped the bank. In fact it was not limited to UBS as the banks across the globe reduced their lending exposure on fear of defaults and rising provisions. The banks also generate some amount as deposits from other banks. Like in 2007 the Due to banks of UBS was CHF 145762 million. This declined by 14% to reach CHF 125628 million in the immediate year. The fall in this category was worse in 2009 as the Due to banks of UBS fell by nearly half to reach CHF 65166 million. This implies that the bank was not able to raise deposits from the other banks as most of the banks feared lending to each other. The Dues to customers represents the amount that the bank is able to generate from the general public. The amount was CHF 145762 million in 2007 and fell by 14% to reach CHF 125628 million in the following year. There was again a decline of 12% in 2009 and this amount was reported as CHF 410475 million. From this it can be inferred that the confidence in the banking sector was the worst hit as the customers of UBS still had faith in the bank as is reflected by the less severity of the fall in the category. There has been a steep fall in the Retained Earnings position of the bank over the period under consideration. In 2007 this amount was CHF 35795 million and in the next financial year it declined by 60% to CHF 14487 million. In the next financial year the amount of retained earnings declined further by 19% to reach CHF 11751 million. This shows that this balance sheet item reduced by more than half in the last three year period. The net profit reported by UBS has declined over the last three year period. However the severity of this fall was in 2008. In 2007 the net loss was limited to CHF 5111 million but in 2008 when the credit crisis was at its peak the net loss increased drastically to CHF 20922 million. With time the bank was able to restrict the steep fall in its earnings. In 2009 the bank reported a net loss of CHF 2118 million. The market condition started improving slowly in this year. However by this time the damage to the financial position of the bank was already done. The fall in the profit explains the sharp fall in the retained earnings position of the company which reported a steep decline of 60% n 2008. From the above analysis it is clear that the financial stability of UBS went haywire in 2008. Even though traces of crisis were already visible as early as 2007 impacting the financials in the year but in the next year there was a blow-out. The situation started improving in the year 2009 with the renewed demand for credit and government initiative. For the third quarter of 2010 the bank reported a net profit (Yahoo Finance-a, 2011). Though UBS could not remain unperturbed by the financial crisis but with time the bank has been successful in overcoming the turbulent phase. Computation of ratios Ratio analysis is an important method of evaluating the financial statements. The ratios serve as an effective tool in the assessment of factors like liquidity, solvency, efficiency profitability etc. Liquidity ratio- The ratios under this category measure a bank’s ability to have adequate cash to pay-off any immediate obligations. Credit deposit ratio- By this ratio one can assess the resource utilization of the bank. This forms an indirect assessment of the bank’s monetary management. UBS reported a credit deposit ratio of 73.07% in the year 2008. This increased to 74.75% in the following year. From this it can be seen that the total advances as a percentage of deposits increased in the financial year 2009. This is not on account of any rise in the loans generated by the banks rather it is on account of a low deposit base in 2009. It implies that the bank was not able to generate sufficient deposits in 2009. Probably this is the reason that the bank granted fewer loans in the year. Even though the bank reported a higher credit deposit ratio in 2009, however, there was a fall in the confidence of the customers as well as the bank as reflected from the fall in the deposits and advances of the bank. Liquid assets to total assets ratio- This ratio is used to assess the extent of liquidity preference of the bank. This is computed as- = Liquid assets/ Total assets Liquid assets comprise cash at bank, cash in hand and short tern deposits. UBS reported this ratio at 1.89% in 2008. This increased to 7.66% in the immediate year. By this ratio one can assess what percentage of total assets is liquid in form. A high ratio implies that the bank has sufficient amount of liquidity. This can be good as well as bad. It is good in the sense that the bank is capable of meeting any unexpected obligations. However, it is bad in the sense that it also implies that the bank has high volumes of unutilized assets in its kitty. Ideally, the banks raise cash in the form of loans or deposits so that it can generate advances. If the banks do not disburse this money as loans to customers then the bank will have to bear the cost of loan in the form of ‘interest on deposits’ i.e. the bank will not gain anything on the amount raise from the customers. For UBS the increase in this ratio has been very high for 2009. From this it can be inferred that in this year the bank has granted a lesser proportion of its assets as loans and advances. Solvency- The solvency ratios help in assessing the solvency position of the bank in the long term. Indebtedness ratio- This ratio indicates the total amount that the bank owes to the creditors. It is measured as- =Total Liabilities/ Net worth Here, the total liabilities include share capital, revenue reserves, capital reserves and statutory reserves, other liabilities etc. The net worth includes share capital and reserves. A low ratio signifies ‘better solvency’. For UBS this ratio is quite high. In the year 2008 the bank reported this ratio at 135.97 and this fell to 110 in the following year. This fall has not been on account of a rise in net worth rather it is due to fall in the total liabilities in the year. There has been a sharp fall in the amount given out to banks as the amount under ‘Dues from banks’ in this year has dropped by 48% in 2009. As a result of this the indebtedness ratio has declined this year. This is in a way good as it means that the bank is finally cutting off its excessive liabilities. Profitability ratios- These ratios help in evaluating the overall efficiency and financial status of the bank. Net profits to total assets ratio- This ratio measures the profit that the bank is able to generate on its asset employment. A rising ratio implies bank’s overall efficiency. For UBS this ratio has been dissatisfactory for the last two years under consideration. In 2008 this ratio was -0.010. In the following year the bank was able to scale down the net losses from CHF 20922 million to CHF 2118 million. Therefore the ratio improved in 2009 partly due to a fall in the amount of net loss and partly due to a fall in the asset base. But still the situation is not good as the bank failed to generate profits for the last three consecutive years. This is a sign of bank’s inefficiency. Efficiency ratio- Gross ratio- This ratio is computed as- = Total expense/ Gross income It helps in ascertaining the efficiency with which the bank utilizes its gross income. For 2008 the bank reported this ratio at 132.74%. This shows that the total expense paid by the bank was much higher than the total income earned by it i.e. interest income and operating income. It is a bad feature as it means that the bank is overspending or the costs incurred by the bank on the raised resources is higher than the income earned by it from them. In the next year the bank was able to bring down this ratio to 91.57%. For 2009 the bank was able to generate higher amount of income as reflected from the rise in this ratio. Only if this ratio is less than 100 the bank can earn profits else there will be a loss. The efficiency of the bank lies in minimizing this ratio. Even though UBS managed to lower this ratio in 2009 but it has not been able to retain profitability suggesting that the bank needs to exercise more control on its overall expenses. Operating ratio- This ratio shows what proportion of gross income is being used to meet the operating expenses. This is computed as- = Operating expenses/ Gross Income *100 A rise in this ratio is viewed as a sign of fall in the bank’s efficiency. UBS reported a ratio of 42.9% in the year 2008 and this increased to 54.6% in 2009. This implies that there has been a decline in the efficiency of the bank. For 2009 the amount of operating expense has gone down but the fall in the amount of gross income has been more than the fall in operating expense. While the total operating expenses has reduced by nearly 11%, the gross income reduced by nearly 30%. Therefore, despite the fall in the operating expense the bank failed to improve its operating ratio (p.46). Loan loss provisions to net interest income- This ratio expresses the relation between interest income and amount of provisions shown in the profit and loss account. Ideally the banks must maintain this ratio at low levels. In the case of banks with a high risk lending this should get compensated in the form of high interest margins. In the event of deterioration in the ratio this must be compensated by adequate margin. UBS reported a loan loss provision to net interest income ratio of 50% in 2008. This is not good as it implies that half of the income earned by the bank is being kept aside as provisions for losses. This ratio improved to 28% in the following financial year. In this year there was a fall in the amount of such loss provision along with the net interest income. This implies that the bank was cautious in terms of lending. In other words the loan portfolio of the bank was comparatively less risky this year. This lowered the net interest income as well as the loan loss provisions. Usually when the risk associated with loan is high the bank charges high interest and vice versa. The fall in the Loan loss provisions to net interest income ratio implies that UBS did not give loans which it deemed to be risky. This lowered its interest income but also reduced the amount of loss provisions on the loans. Equity/Total Assets- The equity is considered to be a cushion against malfunctioning of the asset. By this ratio one can gauge the protection ensured to the bank by the amount of equity investment. A high figure indicates better protection. For UBS this ratio has been low for both the years. For 2008 the bank reported this ratio at 0.74%. This implies that this portion of the assets is backed by equity. This ratio improved to 0.91% in the next year. However, this rise was not on account of a rise in equity rather it was due to a fall in the total assets. It can be said that the equity component in the bank is very limited and the debt component is very high. This is not a good feature as it means that the bank does not have adequate equity protection against the malfunctioning of an asset. Interbank ratio- This ratio refers to the amount that the bank lends out to other banks divided by the amount that it borrows from other banks. A ratio of more than 100 indicates that the bank is “a net placer” and not a “net borrower” in the market. UBS reported this ratio at 51% in 2008 i.e. it was a net borrower in the market. It means that the amount it took as loans from banks was higher than the amount it gave as loans to the same. This trend continued in the next year as well. Even in 2009 this ratio was less than 100 at 71% signifying its net borrower position. This is a sign of illiquidity as it is seen that the banks who are net placers are said to have higher liquidity and vice versa. As UBS is a net borrower its liquidity is less. Liquid Assets & Customer and ST funds ratio- This ratio measures the percentage of funds- short term funds and customer deposits- that can be met by the bank in the event of a sudden withdrawal. A high percentage signifies that the bank is sufficiently liquid to take care of such situations (Flight, 2004, p.138). UBS reported this ratio at 8% in 2008. This ratio improved to 25% in the following financial year. This implies that the liquid resources of the bank are capable of taking care of just 25% of any urgent withdrawals. The figure was even more dismal in the last year. It implies that the bank may be vulnerable in times of “classic run on the bank”. In other words the bank needs to improve its liquid resources so that it may not get affected if the customers demand a sudden return of their funds. Even though the bank has improved this ratio in 2009 there is still enough room for betterment. Asset utilization- This ratio measures the total revenue- interest income & non-interest revenue- that the bank is able to generate on an available asset base. A high ratio is a good sign as it means that the bank is utilizing the asset base efficiently and vice versa. UBS reported this ratio at 3.30% in 2008. This increased marginally to 3.44% in the next year. Compared to the huge asset base of the bank this amount looks small. Even though this ratio increased in 2009 the rise was not on account of a rise in the revenue of the bank rather it was mainly on account of a lower asset base. This shows that interest income of the banks was less as compared to the previous year. It halved from CHF 65679 million in 2008 to CHF 23461 million in the following year. There was a rise in the total operating income this year from CHF 796 million in 2008 to CHF 22601 million in 2008. Efficiency ratio- This ratio measures the cost management ability of the bank. It is computed as- = Non interest expense / NII + Non-interest income A low ratio is desirable as it means that the total income earned by the bank is much more as compared to the non-interest bearing expense or operating expense. UBS reported this ratio at 4.21 in the year 2008. This is very high as it shows that the operating expenses are far more than the revenue generated by it. The bank succeeded in lowering this ratio to 0.87 in the next year. In this year UBS managed to lower the amount of non-operating expenses and along with this the interest expense of the bank declined sharply from CHF 59687 million in 2008 to CHF 17016 million in the following year. A low efficiency ratio implies that a bank can retain profitability even in times of falling revenue. Tier 1 & Tier 2 Capital The capital adequacy ratio of the bank is computed using tier 1 and tier 2 capital. The former is referred to as ‘core capital of the bank’. It includes disclosed reserves and equity capital. Tier 2 capital comprises general loss reserves, undisclosed reserves and subordinated debt. This form of capital does not offer much protection to the depositors and absorbs losses in the event of a winding up. Presently, the minimum tier 1 capital ratio is 4% and the minimum CAR is 8% (Investopedia, 2010). UBS reported a Tier 1 ratio of 11% in the year 2008. This improved further to 15% in the next year. It implies that the core capital of the bank is enough to take care of any losses. In fact it is well above the minimum requirements. The total capital ratio of the bank for the year 2009 has been reported at 19.8% which is higher as compared to the previous year’s ratio of 15%. The tier 1 capital of the bank comprises CHF 356 million of share capital, CHF 38674 million of share premium, revaluation reserves of CHF 38 million, retained earnings of CHF 7064 million and deduction relating to Treasury shares & “Net income recognized directly in equity, net of tax”. The high CAR of the bank suggests that the bank has sufficient cushion to safeguard in the event of liquidation. Key Competitors The key competitors of the investment bank include Citigroup Inc, Credit Suisse Group, and HSBC Holdings Plc. In terms of market capitalization HSBC is at the top with a market cap if USD 195.24 billion followed by Citigroup. UBS ranks thirds among its peers in terms of market cap. In terms of number of employees also the ranking is similar with HSBC employing the highest number of people at 287571 followed by Citigroup and UBS. However UBS lags behind its peers in terms of revenue over the last twelve trailing months. The highest revenue during the period has been reported by Citigroup at USD 61.41 billion. HSBC ranks second on this parameter with a revenue of USD 46.90 billion, Credit Suisse comes third with revenue of USD 35.73 billion. UBS ranks forth with a revenue of USD 34.68 billion over the last twelve months. However the operating margin of UBS is more or less at par with the industry average. This margin represents the efficiency of the bank in exercising control over the operating expenses. A high margin indicates that the profitability of the bank will re main unaffected even in times of falling revenues. Over the last twelve months UBS reported an Operating margin of 31.68%. The leader in this aspect is Credit Suisse with a margin of 32.18%. Citigroup is the laggard in the operating margin aspect as the bank reported this margin at 21.47% which is the lowest among all the investment banks under consideration. In terms of net income over the last twelve months UBS ranks third. Citigroup reported the highest net income at USD 10.67 billion followed by HSBC at USD 8.98 billion. UBS reported revenue of USD 7.41 billion during this period. The EPS of the bank which is also reflective of the outstanding equity position is the highest in the case of Credit Suisse and lowest in the case of Citigroup. For UBS and HSBS the EPS ranges between USD 1.90 and USD 2.60. From this it may be drawn that the former does not have much outstanding equities floating in the market. Overall it can be said that UBS ranks third among its peers from the financial point of view (Yahoo Finance-b, 2011). Analysis of business news In a Thomson Reuters news report it has been said that the financial performance of UBS improved in the year 2009. In the words of John Cryan, CFO of UBS the bank succeeded in strengthening its capital towards the middle of 2009 and is likely to continue the same. In a conference Cryan disclosed his bullish view on UBS and also commented on its improvement with time. As per Cryan risk management remains the top priority of the investment bank. He also commented that the bank has the right scope and scale and also warned against any banking overregulation. Cryan feared that might also impact the capital flow (Rhodes, 2009). For 2010 UBS reported strong performance in the second quarter as compared to other Wall Street giants like Citigroup Inc and Goldman Sachs. This pushed up the share prices of UBS by 10 percent and the investors are of the view that this rise was based on the restructuring strategy of the bank’s Chief Executive. The investors viewed UBS as a winner, based on its tier 1 capital ratio of 16.4 percent, from the decision of the regulators to soften the new rules for the banks. UBS reported a profit in the third quarter of 2010 after reporting huge losses for the last two years. According to Marc Gabelli, Gabelli Group’s President, UBS franchisee is in a solid position and he expects the figures to improve in the coming years (Jucca & Taylor, 2010). Conclusion In the recent financial crisis none of the investment banks could remain unscathed. Some of the financial giants like Lehman Brothers collapsed while many others were rescued by government aid. During this time the financial performance of UBS deteriorated drastically. The investment bank cut down in its loans and advances. The bank reported big losses in the years 2009 and 2008. There was a sharp fall in its revenue base on account of the sharp fall in its interest income which fell by nearly one-third in 2009 as compared to 2008. The performance of the bank has started improving towards the end of 2009 based on its restructuring and advanced risk management strategies. Reference Flight, A. 2004. Understanding international bank risk. John Wiley and Sons. Hosamani, S.B. 2002. Performance of Regional Rural Banks. Anmol Publications PVT. LTD. Investopedia. 2010. Key Ratios/Terms. The Industry Handbook: The Banking Industry. Retrieved on January 21, 2011 from http://www.investopedia.com/features/industryhandbook/banking.asp Jucca, L. Taylor, E. 2010. UBS outshines Deutsche Bank, as wealth turnaround nears. Reuters. Retrieved on January 21, 2011 from http://uk.reuters.com/article/idUKTRE66Q0KV20100727 Rhodes, J. 2009. UPDATE 1-UBS's performance getting better by the day –CFO. Reuters. Retrieved on January 21, 2011 from http://www.reuters.com/article/idUSLU6282020090930?pageNumber=1 Thirkell-White, J. 2004. UBS: brand building in a global market. World Advertising Research Center. Retrieved on January 21, 2011 from http://www.prophet.com/downloads/articles/UBS_case_study_Admap.pdf Yahoo Finance-a. 2011. Key Statistics. UBS AG (UBS). Retrieved on January 21, 2011 from http://in.finance.yahoo.com/q/ks?s=UBS Yahoo Finance-b. 2011. Competitors. UBS AG (UBS). Retrieved on January 21, 2011 from http://finance.yahoo.com/q/co?s=UBS+Competitors UBS. 2011. Our clients & businesses. Retrieved on January 21, 2011 from http://www.ubs.com/1/e/about/our_businesses.html WordPress. 2011. UBS Financial Services – What Do They Do. Retrieved on January 21, 2011 from http://www.philomathfoundation.org/financial-service/ubs-financial-services-what-do-they-do.html Bibliography Jucca, L. 2009. UBS won't stem withdrawals soon as Q3 disappoints. Reuters. Retrieved from http://www.reuters.com/article/idUSTRE5A20PW20091103 Rhodes, J. de Sa'Pinto, M. 2010. Analysis - UBS CEO Gruebel could teach CS pupil Dougan a lesson. Reuters. Retrieved from http://uk.reuters.com/article/idUKTRE68045E20100901 Annexure Read More