TheChek News Flow

UBS bought while the blood was flowing at crosstown rival Credit Suisse in March and bagged an enormous payday. Or did it?

The stolid Swiss institution, an original gnome of Zurich, posted the biggest quarterly profit in world banking history, by a long way, for the second quarter: $29 billion. Shares rose 2.5%, bringing their gain since the deal was announced to more than 40%.

That doesn’t mean UBS Group (ticker: UBS) actually earned anything.

Virtually all the black ink came from “negative good will” on the Credit Suisse acquisition. That is to say UBS paid about $3 billion for Credit Suisse assets that it now reckons are worth $32 billion. Credit Suisse was just a big mess, not a black hole as panicked shareholders, depositors and Swiss regulators feared.

A mess it remains, though, which UBS needs to clean up before the combined group can reliably make money. “The profit number tells us that UBS did not really find any toxic assets on Credit Suisse’s balance sheet,” says Johann Scholtz, an analyst covering European banks at Morningstar . “Management’s artwork starts now.”

Credit Suisse is still losing $2 billion every quarter, estimates Andreas Venditti, head of banks research at Bank Vontobel. The gaping wound is its investment bank, where revenue plummeted 78% year-over-year in the latest results, costs just 15%.

UBS CEO Sergio Ermotti aims to slash head count commensurately. But firing investment bankers is apparently expensive, too. UBS has earmarked $10 billion for “restructuring expenses,” Scholtz says.

Ermotti will try to cut around pieces of the investment bank that are thriving, like the U.S. leveraged finance practice.

UBS also added $4.5 billion in litigation provisions, preparing for the avalanche of lawsuits that followed Credit Suisse’s demise.

The good news is that Credit Suisse’s wealth management business, the likely reason UBS wanted it in the first place, looks to be stabilizing.

The division bled a quarter of its assets, some $200 billion, between October and May, as rich clients and relationship managers jumped ship, Venditti says. Flows for the past three months turned slightly positive.

UBS boasts a well-regarded management with deep restructuring experience. Ermotti rescued UBS itself from dire straits after taking the helm in 2011, shrinking a deadweight investment bank and doubling down on private banking. UBS brought him out of retirement in April to repeat the trick with Credit Suisse.

“Ermotti and his team have pretty much done this before,” Scholtz says. “Their strategy is absolutely sound.”

Analysts are divided on whether UBS stock has further to run. Scholtz has downgraded to three stars, Morningstar’s equivalent of Hold. He prefers more retail-oriented European banks like Netherlands-based ING Groep (ING) or Lloyds Banking Group (LYG) in the U.K., whose interest income is burgeoning as rates rise.

Gildas Surry, a portfolio manager at Axiom Alternative Investments, is “very constructive” on UBS. He likes the acquisition’s synergies in Swiss banking and wealth management, and a conservative approach to valuing Credit Suisse’s legacy assets. “The new combined franchise will be driven by massively positive operating leverage,” he says.

As an act of public-private crisis management, the Credit Suisse rescue looks like a ringing success. UBS waived a CHF 9 billion ($10.1 billion) loss backstop from the Swiss government last month. It has reduced job-loss estimates within Switzerland from 10,000 to 3,000.

Whether the combined bank becomes a humming profit machine servicing the world’s wealthy remains to be seen.

Utility stocks keep getting slammed this year. That’s leaving investors with opportunities—such as the cheap Avista .

The Utilities Select Sector SPDR exchange-traded fund (ticker: XLU), down 12% during the past 12 months, has fallen out of favor with investors this year. First, they were dumped for being safe stocks as investors abandoned recession fears and embraced riskier fare. Higher rates also made utilities’ dividend yields less attractive. More recently, wildfires in Hawaii and elsewhere have raised the possibility of legal liabilities for utility companies, another pressure point on their shares.

The selling has gotten out of hand. The Utilities ETF trades for less than 16 times 12-month forward earnings, down from around 20.41 one year ago and its lowest since April 2020. It also trades at a discount to the S&P 500 index, when it typically trades at a premium. Utilities don’t get much cheaper than that.

Concerns about utilities are overblown, and their earnings could be much stronger than expected. The companies are adding clean-energy power plants faster than they’re retiring old ones. That allows them to grow their “rate base,” a boon for profits because states typically allow them to earn a fixed return on the equity of those assets.

In other words, as assets grow, so do earnings.

You can’t go wrong with the Utilities ETF, which spreads the risk among 30 stocks and charges a 0.1% management fee. But for investors looking for a single stock, Avista (AVA), down more than 25% this year, is particularly cheap. It trades for about 13.7 times earnings, its lowest multiple in more than 10 years.

There are a few factors holding back the stock—factors that should start reversing soon. For the past few years, the company was less aggressive in requesting rate base increases as it sought to sell itself to Canadian utility Hydro One (H.Canada). Regulators denied the deal, and a stand-alone Avista, which operates in Washington, Idaho, and Oregon, has some catching up to do. Analysts expect total assets to grow a mere 3% this year to just under $7.7 billion, with return on equity creeping higher to 7.1%, though that’s still under the 10.3% seen in 2019.

Extreme flooding caused by Storm Daniel devastates Greece

Heavy rainfall kills at least 7 people as fire department evacuates thousands from worst-hit areas

Extreme rainfall and flooding have claimed the lives of at least seven people in central and northern Greece after Storm Daniel swept across the region for three consecutive days, causing billions of euros of damage, destroying properties and leaving large areas without electricity and water.

Hundreds of people, waiting to be evacuated as floodwaters exceeded 2 metres in some areas, were found stranded in their homes on Friday. Since the floods started on Tuesday, more than 1,900 rescues have taken place in Thessaly, the main region hit by the storm, and the wider area, according to the fire department, while more than 6,000 calls for help were recorded.

Prime minister Kyriakos Mitsotakis visited the region on Friday, reassuring local authorities that “we will do everything humanly possible” to help affected areas. He also stressed that he would mobilise “whatever resources are available” from the EU to assist the recovery operation.

The floods followed two weeks of large-scale wildfires in northeastern Greece, intensifying concerns about extreme weather patterns caused by climate change across southern Europe. The wildfires were the largest recorded in the EU to date, according to the EU’s Copernicus monitoring service. Storm Daniel also hit areas of Turkey and Bulgaria.

Kostas Agorastos, governor of Thessaly, told the state broadcaster ERT that the damage caused by the storm was valued at more than €2bn.

“The recording of the damages will begin immediately [as will] compensation for the houses that have been destroyed”, Mitsotakis said at a meeting with mayors in Karditsa, one of the worst-hit towns in the region.

According to Greek officials the rainfall measured over one 12-hour period — more than 700 tonnes per acre — was nearly double the amount that typically falls on Athens in one year.

More evacuation orders were issued on Friday as authorities sent alerts to mobile phones in the area, warning that the Pineios River was overflowing. Parts of Larissa, Thessaly’s administrative capital and largest city which is situated 20km from the river, were already starting to flood.

The Thessalian plain is Greece’s main agricultural breadbasket and accounts for more than 22 per cent of the country’s agricultural production. Much of the region’s agricultural resources have now been destroyed.

“I don’t think we have realised the magnitude of this disaster yet,” said Professor Efthymios Lekkas, a disaster management expert, on ERT. Significant deposits of clay and silt, up to half a metre thick, would prevent the cultivation of crops for the foreseeable future, he said, adding that it would take at least five years for the plain to be fertile again.

Annual auction received no bids, but all is not lost

In tennis one calls this result a bagel, a zero. The UK’s latest annual power auction received no offshore wind power project bids, the government said on Friday. It had served up a power price cap equivalent to about £60 per megawatt hour in today’s prices. That proved too low. Nevertheless, this could be good news for the wind industry.

Consider this a predictable surprise. A pre-announced price cap was about a fifth below a recent Irish Sea auction. Some companies had moaned publicly about the proposed UK price. That offered a warning. Wind farm companies refused to participate.

All is not lost. German bureaucrats took a parsimonious view on their price cap in a December wind auction, producing a historically low subscription rate near 20 per cent. Higher prices in the next two quarterly auctions earlier this year boosted that interest about seven times.

This issue is not limited to Europe. Massachusetts had to cancel offshore wind projects when bidders pulled out. Seeing this, New York watchdogs sound more pragmatic. They are considering petitions for increased power purchase agreements. These average 48 per cent on four projects from auction winners including Equinor, BP and Ørsted, notes Deepa Venkateswaran at Bernstein.

New York does not want delays. But these will hit the UK offshore wind sector if the British government does not act promptly. With no change to the schedule, an upward adjustment to the price cap would require a year’s wait. Plus some earlier wind projects are also stalling. The government could miss its offshore wind capacity target of 50GW for 2030.

Any fault goes to bureaucrats concerned about inflationary pressures. But natural gas volatility is the main factor in power price fluctuations. In coming years, offshore wind can offer more additional scale than most other renewable power sources. That means the sooner offshore wind power comes on stream the faster gas can be replaced.