UBS to deliver on Dividend; Credit Suisse likely to miss
Capital return beats and misses, we think, will drive much of relative bank performance in 2015 (our “the good, the bad and the challenged” thesis). We continue to think UBS can hit and beat expectations, and CS likely miss. We update PTs and EPS for Sfr move.
The need for CS to increase its equity leverage ratio by ~30% (2.3% to 3.0%+) to hit our base case of new equity leverage ratio within a revised 'going concern' leverage ratio remains a constraint on divis & capital plan, we think. We expect to get more clarity on new Swiss standards for equity and “going concern” leverage ratio in Q1. Whilst CS targets a 3% equity leverage ratio by end 2015e, our base case is that this is more likely in 2016e, and the recent Swiss franc move also may make the target more challenging. Given all the uncertainties of running a capital markets business and litigation uncertainty, we continue to think CS could clear the air by scripping or cutting the 2014 divi and accelerating meeting the new realities. Our recent meeting with CS's CFO underscored that the bank is keen to show consistent improvement in the leverage ratio. After 3 quarters of no improvement, it seems plausible it will rise somewhat in Q4 - in part through the sale of a flagship high value Zurich property to Swatch before Christmas and some deleveraging. But we also see another Sfr1bn+ litigation around US mortgage issues as likely.
With this note we update our EPS, PT (to SFr 25) and capital ratios for the Swiss franc move to 11.7% CET1 and 3.1% equity leverage ratio in 16e. We have assumed a degree of additional cost cutting, as we saw at Baer, to offset NIM headwinds and Swiss franc appreciation. The key catalyst for a re-rating would be if CS not only announced extra cost cutting but rebalanced the group to lower capital allocated to the investment bank over time. The stock trades at 0.8x TNAV for MSe ~12% ROTE in 16e.
At UBS, on the other hand, we see a meaningful chance of a higher dividend for 2014e, notwithstanding the headwinds from unresolved litigation, Swiss franc move and low yields. A large uncertainty for UBS remains litigation, but we see progress being made as FX is being addressed at levels below consensus' fears. Our thesis has been “that bid/ask on FX & other litigation would narrow substantially in Q4 2014 and so open the door to greater clarity on divis and capital planning into 2015.” We have SFr0.75bn and SFr1bn in our litigation costs for Q42014e and 2015e respectively. UBS reserved SFr1.7bn in the i-bank for Q3, we deduce from disclosure for FX, although clearly we need to wait until it's finalised. We continue to think divis are key to unlocking value and that UBS could have one of the highest dividend yields in the banks sector in 2015/16 as it works through its issues. In part this is driven by a booster as capital tied up in non-core is freed-up (of ~SFr4.6bn), FINMA add-on reversal (currently implied~SFr2.5bn) alongside DTA recognition. We've argued capital will be supported by FINMA add-on being reversed as litigation is settled. Our recent meeting with the CFO also gave us confidence on more cost cutting from rethinking the operating model likely, although this may only offset recent Swiss franc moves in the near term.
We also update our UBS estimates (please see exhibits in the next section) . The stock trades on ~1.3x our TNAV for a ~14% ROTE in 16e. We continue to rate UBS Overweight with a new PT of SFr20, with the biggest risk being litigation.