equity research: buy case on ubs; hold cs

7/30/2019 Equity Research: BUY case on UBS; HOLD CS

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This document is a marketing communication and is not independent research prepared in accordance with legal requirements

designed to promote the independence of investment research and is not subject to a prohibition on dealing ahead of the

dissemination of investment research.

For Reg-AC certification, see the end of the text. Liberum Capital does and seeks to do business with companies covered in this

communication. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of

this report. Investors should consider this report as only a single factor in making their investment decision.

10 January 2013 European Equity Research

Road to Damascus: Long Paul vs. SaulSwiss Banks: BUY UBS; HOLD Credit Suisse

EUROPE | BANKS | UBSN VX | CSGN VX

We believe that UBSs decision to radically shrink the capital consumption of its value-destructive IB

division by a further 57%, and cut IB headcount by some 7,000 will more than double the Groups cap-

adjusted Return on Basel 3 Equity (RoB3E) from 11.2% in 2012 to 26.0% in 2015. With the capital released

we expect dividends of at least CHF1.10 by 2015 implying a sustainable yield of 7.4% with special

dividends taking the 2015-17e average yield to 11.9%. We believe that the effect of all this remains

markedly underappreciated by the market. BUY with a price target of CHF18. By contrast, CS remains

committed to its low-RoE IB division which by 2015 we estimate will still consume c60% of group capitalwhilst earning returns of just 5.2% - well below the cost of equity. An ongoing risk of cross-division

subsidisation will depress the rating. On this basis we believe that CS trades at around fair value. HOLD

but watch for any hint of shrinking and capital rationing at the IB, in which case there is the possibility of

an immediate 8-15% upside.

Dramatic cost reduction for UBS, less so at CS: By 2015e we expect UBS will have cut operating expensesby CHF3bn (13%) via a 15% reduction in headcount. CS will have reduced costs by a more mundane 4%,

CHF0.9bn, with a 4% decline in head count.

Rapidly improving capital positions for both UBS and CS: By YE14e UBS will have a Basel 3 core equitytier 1 of 13.6% (vs 3Q12: 9.3%), well in excess of its self imposed capital target. CS will have reached a less

impressive 11.0% (3Q12: 7.5%), but ahead of fully implemented regulatory requirements.

Stable/falling RWAs by 2014/15 imply both UBS and CS will be strongly cash generative: By YE 15e UBSwill achieve returns of 26% (capital & regulation adj.) on RWAs of CHF200bn. Declining RWAs and improving

capital ratios can allow for significant distributions eg. A potential dividend of CHF1.75 in 2015 (11.7% yield).

Similar logic implies a 7.7% yield for CS (although it is likely to deploy much of this cash in its IB in our view).

UBS has CHF24.6bn of unrecognised potential deferred tax assets (UPDTAs) due to historic losses. Weestimate an NPV for these of CHF 7.5bn (13% mkt cap, or CHF2.0/share) which bolsters our valuation case.

Valuation: We use a SoTPs valuation approach taking account of UBSs superior capital position and UPDTAsas well as the higher regulatory drag CS is likely to experience from coming regulatory changes. For a variety of

reasons we apply a higher multiple to UBS WM business. We suggest 18% relative upside for UBS vs. CS.

Cormac Leech

+44 (0)20 3100 [email protected]

Figure 1: Summary valuation and recommendations

Target price & ratings 1) Underlyi ng 2013E 2) U/L Reg&Cap adjust ed 2013E4

Rec PriceTarget

Price % Upside EPS PEx TCE1 p/TCE RoTCEDiv

Yld6Cap

surplus2Cap surp3

%mkt cap EPS PEx5CoreTCE p/TCE5 RoTCE

UBS CHF Buy 14.3 18.0 20% 1.22 12.3 12.0 1.2 10.9% 1.3% 2.5bn 4% 1.34 10.0 10.1 1.2 13.2%

CS CHF Hold 24.4 25.0 2% 2.40 10.2 22.3 1.1 11.0% 3.1% 0.5bn 2% 2.28 10.4 22.2 1.2 10.3%

Avg 11% 11.2 1.2 10.9% 2.2% 3% 10.2 1.2 11.7%

1. TCE=Tangible Common Equity per share ; 2. Surplus = equity capital surplus under fully loaded Basel III vs. 10% target; 3. surplus as % of market cap ; 4. 2013E Reg&CapAdjnumbers are ex 1-offs, ex UBS legacy assets, and after buying back shares to eliminate capital surplus ; 5. ratios calculated after deducting 2012-13E announced dividends, UBS

UPDTAs & value of capital allocated against legacy assets to increase comparability. 6. 2013e div yield. Share price data COB 7th January 2013. Source: Liberum Capital, Bloomberg


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10 January 2013 Road to Damascus: Long Paul vs. Saul

2 www.liberumcapital.com

Contents

UBS 22

Credit Suisse 33

Appendix 44


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www.liberumcapital.com 3

Road to Damascus: Long Paul vs.SaulWe Swiss are farmers, not hunter-gatherers. The asset management business suits ourcharacter as well as our historical position. Your investment banking business, though, has

never made a penny for your shareholders...1, Swiss National Bank to UBS Chairman in

2010

Both UBS and CS are reducing costs to address a weaker revenue

environment. However UBS plans a considerably more aggressive 57%

shrinkage in IB RWAs, vs 3Q12 level, via radical restructuring. By contrast CS

still maintains committed to its IB division which will consume 63% of Group

Capital by YE15e while generating returns on Basel 3 equity of only 5.2% (post

Basel 3/ Dodd Frank/cost savings). As a result by 2015, UBS will have a capital

and regulation adjusted RoB3E of 26.0% vs. only 13.3% for CS a divergencenot yet fully discounted in our view. Over time we expect UBS share price

outperformance may encourage CS to follow suit boosting fair value by 8-16%

UBS and CS face a sluggish revenue environment. We estimate by 2015 revenues

will be c 13-15% below 2010 levels. However both UBS and CS have credible plans

to reduce costs (figure 15) to counter subdued revenue outlook. We estimate cost

income ratios for both banks of 72-74% by 2015e from 2012e levels of 78-81%.

Figure 2: Summary underlying P&L excluding 1-offs*

% Ch

CHF bn 2010 2011 2012e 2013e 2014e 2015e 2011 2012e 2013e 2014e 2015e 2015/2010

Revenues

UBS 31.1 27.9 27.9 27.5 27.4 27.0 -10% 0% -1% 0% -1% -13%

CS 30.4 24.4 25.7 25.6 25.5 25.9 -20% 5% 0% 0% 2% -15%

Costs

UBS -23.9 -22.0 -22.5 -21.2 -20.3 -19.5 -8% 2% -6% -4% -4% -18%

CS -23.3 -21.2 -20.0 -19.6 -19.2 -19.2 -9% -5% -2% -2% 0% -18%

Cost change

UBS 1.9 -0.5 1.3 0.9 0.8

CS 2.1 1.1 0.4 0.4 0.0

Revenue adj, cost change

UBS -0.5 -0.5 1.1 0.8 0.5

CS -2.4 2.1 0.3 0.4 0.3

Cost Income

UBS 77% 79% 81% 77% 74% 72% 2% 2% 2% -4% -3% -5%

CS 77% 87% 78% 77% 75% 74% 10% 10% -9% -1% -1% -3%

PBTUBS 7.1 5.8 5.2 6.3 7.0 7.4 -18% -10% 20% 13% 5% 4%

CS 7.2 3.1 5.5 5.7 6.1 6.5 -57% 80% 4% 6% 7% -10%

*Excluding UBS STAB option volatility, business realignment costs, exception litigation, 1-off rebound gains, gains on disposals and other 1-offsSource: Company Reports; Liberum Capital

UBS: 13% PBT CAGR 2013-15e: On a summary divisional basis UBS we expect

the asset and wealth management business to grow at an average 11-17% over

2013-15e resulting in average underlying PBT growth for UBS of 13% despite only

modest PBT growth in the IB due to exiting of certain FICC business. For full UBS

divisional P&Ls, excluding 1-off items, see figures 36-43.

1h t t p : / / t i ny u r l . com / a thw 8 tm , Martin Taylor (former Barclays CEO) FT op-ed 2Nov2012.


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Figure 3: UBS summary underlying divisional P&L

CHF bn 2010 2011 2012e 2013e 2014e 2015e 2016e 2017e 2011 2012 2013 2014 2015 2016 2017

Wealth Mgmt 2.4 2.3 2.3 2.8 3.0 3.1 3.3 3.5 -3% -2% 22% 8% 5% 6% 6%

Retail & Corporate 1.8 1.7 1.6 1.8 1.8 1.8 1.8 1.7 -6% -3% 12% 0% -1% 0% -3%

Global Asset Management 0.5 0.5 0.5 0.6 0.7 0.7 0.8 0.8 -12% 11% 24% 11% 6% 4% 4%

Investment Bank 2.2 1.1 0.9 0.8 1.0 1.0 1.0 1.1 -49% -15% -15% 29% 0% 1% 1%Wealth Management USA 0.3 0.5 0.8 1.1 1.3 1.3 1.4 1.5 86% 75% 32% 14% 6% 6% 3%

Centre Core 0.0 -0.2 -0.9 -0.8 -0.7 -0.6 -0.5 -0.5 -12% -15% -17% -11% -11%

Total Underlying PBT ex legacy 7.1 5.8 5.2 6.3 7.0 7.4 7.8 8.1 -19% -10% 20% 13% 5% 5% 4%

Centre- Legacy 0.0 0.0 0.0 -3.5 -3.5 -1.0 0.0 0.0

U/L PBT including legacy 7.1 5.8 5.2 2.8 3.5 6.4 7.8 8.1 -19% -10% -47% 29% 81% 21% 4%

1-offs 0.3 -0.4 -7.5 0.0 0.0 0.0 0.0 0.0

Reported PBT 7.4 5.4 -2.3 2.8 3.5 6.4 7.8 8.1

Group MI s -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3

U/L Attributable 5.3 4.2 3.8 4.6 5.2 5.5 5.8 6.0 -19% -11% 22% 13% 5% 5% 4%

U/L EPS 1.4 1.1 1.0 1.2 1.4 1.5 1.5 1.6 -19% -11% 23% 13% 5% 5% 4%

Basel 3 RWAs 380 380 266 226 211 200 192 195

RoTCE at 10% CT1* 13.8% 11.2% 11.7% 18.8% 24.0% 26.9% 29.6% 31.2%

*not adjusted for financial regulation (e.g. Dodd Frank, ring-fencing etc)Source: Company Reports; Liberum Capital

CS: 5% PBT CAGR 2013-15e: Similarly for CS in the asset and wealth

management divisions we forecast average 2013-15 annual PBT growth of 9-26%

resulting in group PBT growth of 5% despite flat PBT in the IB (due to sluggish FICC

revenues). For full divisional P&L, ex 1-off items, see figures 51-57.

Figure 4: CS summary underlying divisional P&L

2010 2011 2012e 2013e 2014e 2015e 2011 2012e 2013e 2014e 2015e

Wealth Mgmt 2.5 1.9 2.2 2.5 2.7 2.9 -26% 19% 9% 9% 9%

Corporate & Institutional 0.9 0.9 0.9 0.9 0.9 0.9 -2% 3% 0% 0% 3%

Investment Bank 3.6 0.1 2.7 2.6 2.6 2.6 nm nm -3% 0% 2%

Asset Management 0.5 0.6 0.3 0.5 0.6 0.6 18% -43% 47% 23% 9%

Corporate Centre -0.3 -0.3 -0.6 -0.7 -0.7 -0.6 19% 92% 14% 0% -8%

U/L Total PBT 7.2 3.1 5.5 5.7 6.1 6.5 -57% 80% 4% 6% 7%Rev 1-offs 0.2 1.0 -1.8

Cost 1-offs -0.6 -1.3 -0.8 -0.5 -0.3 -0.3

1-offs -0.4 -0.3 -2.6 -0.5 -0.3 -0.3

Reported Total PBT 6.8 2.7 3.0 5.2 5.8 6.3

Reported total check 6.8 2.7 3.0 5.2 5.8 6.3

U/L PAT 5.6 2.3 4.5 4.4 4.7 5.0

U/L Attributable 4.9 2.0 3.9 3.8 4.1 4.3

Basel 3 RWAs 398.7 330.0 298.7 277.4 284.7 295.4

U/L PBT/Avg RWAs 1.8% 0.8% 1.8% 2.0% 2.2% 2.2%

Ro B3E @10% CT1* 12.2% 5.6% 12.5% 13.3% 14.4% 15.0%

*not adjusted for financial regulation

Source: Company Reports; Liberum Capital

Below consensus for UBS and CS EPS by 2% and 8% respectively

For UBS we are on average 2% above consensus EPS and 2% below on revenues.

For CS we are on average 8% below consensus EPS and 10% below on revenues.


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Figure 5: Liberum revenue and EPS forecasts vs. Bloomberg consensus

% Ch

CHF bn 2011 2012e 2013e 2014e 2015e 2016e 2017e 2012e 2013e 2014e 2015e 2016e 2017e

UBS

LC e u/l revenue bn 27.9 27.9 27.5 27.4 27.0 27.8 28.5 0% -1% 0% -1% 3% 3%

LC e reported revenue 29.8 25.6 27.5 27.4 27.0 27.8 28.5Consensus 25.5 27.3 28.2 28.1 n/a n/a -14% 7% 3% 0%

LCe/ Consensus 0% 1% -3% -4%

LC e Adj EPS 0.99 1.22 1.38 1.46 1.53 1.59 -11% 23% 13% 5% 5% 4%

Consensus 1.03 1.08 1.34 1.61 2.10 n/a -7% 5% 24% 20% 31%

LCe/ Consensus -4% 13% 3% -9% -27%

CS

LC e u/l revenue bn 25.7 25.6 25.5 25.9 5% 0% 0% 2%

LC e reported revenue 24.0 25.6 25.5 25.9

Consensus 24.4 27.0 28.4 30.6 -4% 10% 5% 8%

LCe/ Consensus -2% -5% -10% -15%

LC e Adj EPS 2.29 2.40 2.54 2.73 86% 5% 6% 8%

Consensus 1.84 2.51 2.90 2.99 50% 36% 16% 3%LCe/ Consensus 24% -4% -13% -8%


For UBS sharp rise in RoB3E due to reduced CapitalConsumptionCapital consumption change 2011-15: down 47% for UBS; down 13% for CS

For Credit Suisse, the reduction in RWAs from YE11-YE15e is likely to be much less

than for UBS. From YE11-15e, UBS will have reduced its RWAs by 47% to

CHF200bn vs. a 13% decline for CS to CHF295bn.

Figure 6: UBS and CS Basel 3 RWAs CHFbn 2010-2017e

150

200

250

300

350

400

450

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

UBS CS

Source:

UBS RWA shrinkage implies a reduction in required capital of CHF18bn by YE15e

vs. YE11 equivalent (32% of mkt cap) vs. a decline in RWAs of only 14% for Credit

Suisse (11% of mkt cap).

UBSs Capital consumption will

drop by 47% 2011-2015 vs. a drop

of only 13% for CS


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2012-15e: UBS RoB3E will more than double; limited improvement for CS

Despite both banks making significant improvements in attributable income, UBS will

deliver a stronger increase in Cap&Reg adjusted RoB3E 2012-15e, rising from

11.2% to 26.0% compared to CSs more subdued rise from 9.8% to 13.3% for CS.

This divergence explains much of expected TSR outperformance we expect forUBS.

Figure 7: Change in RWAs and impact on Return on Basel 3 equity at 10% gearing

2011 2012e 2013e 2014e 2015e

RWAs Basel 3

UBS 380 266 226 211 200

CS 339 299 277 285 295

Capital requirement at 10%

UBS 38 27 23 21 20

CS 34 30 28 28 30

Cumul. Chnge in Capital requir ed

UBS (11) (15) (17) (18)

CS (4) (6) (5) (4)

Cumulative capital release as % mkt cap

UBS -20% -27% -30% -32%

CS -10% -16% -14% -11%

Attributable Income

UBS 4.3 3.8 4.6 5.2 5.5

CS 1.5 3.6 3.8 4.1 4.4

Return on Basel 3 equit y at 10% gearing to RWAs

UBS 11.2% 11.7% 18.8% 24.0% 26.9%

CS 4.0% 11.4% 13.3% 14.4% 15.1%

Return on Basel 3 equity adjusted for regulation*

UBS 10.7% 11.2% 18.1% 23.2% 26.0%

CS 2.7% 9.8% 11.5% 12.6% 13.3%

*assume minus CHF0.5bn net of tax impact for CS and minus CHF0.2bn impact for UBS due to Dodd Frank and Ring-Fencing etcSource: Liberum Capital

Comparing Return on Basel 3 equity (RoB3E) is more meaningful than RoTCE

due to differences in composition of TCE for both banks:

As figure 8 illustrates due to items such as unrealised losses from cash flow hedges,

TCE per share is 73% higher than Basel 3 equity regulatory capital for UBS vs. only

42% for CS which misleadingly depresses UBSs relative RoTCE. Since Basel 3

equity capital determines capital adequacy, RoB3E is a more meaningful

For UBS the underlying RoB3E will

more than double from 2012-

2015e vs. a much more muted

32% rise for CS mainly due to

differences in divergence in capital

consumption but also due to more

rapid earnings growth due to

business mix changes


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Figure 8: Bridge from TCE to Basel 3 equity capital 3Q12

B3 equity =

100% Per Share

% Basel 3

RWAs

CHF bn UBS CS UBS CS UBS CS UBS CS

Shareholders equity 52.4 35.7 14.0 22.4

Goodwill -6.6 (8.9) -1.8 -5.6Mandatory convert 0.0 3.6 0.0 2.3

Tangible Common Equity 45.8 30.4 173% 142% 12.2 19.115.2

% 9.9%

Unrealised losses from Cash flow hedges -3.2 -12% 0% -0.9 0.0 -1.1% 0.0%

Treasury shares -0.7 -3% 0% -0.2 0.0 -0.2% 0.0%

ex Fair Value Own Debt (FVoD) -0.1 (0.3) -1% -1% 0.0 -0.2 0.0% -0.1%

Pension plan adjustments 0.0 2.8 0% 13% 0.0 1.8 0.0% 0.9%

Qualifying non controlling interest 0.0 3.2 0% 15% 0.0 2.0 0.0% 1.1%

Other Capital deductions (3.7) (1.8) -14% -8% -1.0 -1.1 -1.2% -0.6%

Basel II core tier 1 38.0 34.4 144% 160% 10.1 21.6

12.6%

11.2%

Ex non controlling interests (3.2) 0% -15% 0.0 -2.0 0.0% -1.1%

Deferred tax -5.3 (7.2) -20% -34% -1.4 -4.5 -1.8% -2.3%

Pension -3.8 -14% 0% -1.0 0.0 -1.3% 0.0%

StabFund Option -1.0 -4% 0% -0.3 0.0 -0.3% 0.0%Net Other deductions 0.0 (1.0) 0% -5% 0.0 -0.6 0.0% -0.3%

Basel III equity tier 1 co def 28.0 22.9 106% 107% 7.5 14.4 9.3% 7.5%

Libor rigging litigations/fines (1.5) (1.5) -6% -7% -0.4 -0.9 -0.5% -0.5%

Basel III equit y tier 1 LCe def 26.5 21.4 100% 100% 7.1 13.5 8.8% 7.0%

#shares outstanding diluted 3.7 1.6

Basel 3 RWAs 301 307

Attributable 2012e 3.8 3.2

RoTCE 8.3%

10.7

%

Ratio of RoTCE for CS vs. UBS in 2012** 1.3x

RoB3CT1 14.3% 15.1%

Ratio of RoB3CT1 for CS vs. UBS in2012** 1.1x

*Fully loaded; CS returns are higher due to a lower capital ratio.Source: Company accounts; Liberum Capital

Figures 9 and 10 show our forecasted returns for UBS and CS on an i) underlying

basis ii) After assuming a buyback/ special dividend to eliminate excess capital iii)

After also adjusting for the earnings drag from more onerous regulation: By 2015 on

a FinReg and Cap adjusted basis we expect UBS and CS to achieve a RoB3E

of 26.0% and 13.3% respectively which is the most meaningful valuation

metric in our view

Figure 9: UBS underlying return on Basel 3 equity Figure 10: CS underlying return on Basel 3 equity

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015

UBS underly ing UBS Cap Adj UBS FinReg Cap Adj

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015

CS under ly ing CS Cap Adj CS F inReg Cap Adj

*FinReg: Financial Regulation such as Dodd Frank and Ring FencngSource: Liberum Capital

*FinReg: Financial Regulation such as Dodd Frank and Ring FencngSource: Liberum Capital

Analysis of composition of TCE

shows that a relatively large

proportion of UBSs tangible book

value is not eligible Basel 3 equity

capital which tends to misleadingly

understate relative returns on

equity vs. CS.


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UBS could annually yield 11.9% 2015-17e; CS 8.6%UBS has scope to pay significant dividends: 9.5% by 2015e (7.4% sustainable)

Our base case forecasts UBS will pay a cash dividend equivalent to a 3.3% yieldin 2014, rising to a 9.5% in 2015-2017e. Despite this substantial yield, the Basel

3 core tier 1 continues to climb reaching 15.8% in 2017e.

Alternatively solving for a steady 13.6% Basel 3 equity ratio (the YE13e level)implies an average annual 11.9% yield over 2015-17.

The maximum sustainable underlying yield over the same period assuming 5%annual growth would be 7.9% (assuming 5% normalised RWA growth) implying a

4% annual special dividend from 2015-17e (i.e. 7.9%+4.0%=11.9%) as the

business transitions.

Put differently from YE14-YE17e, UBS will generate distributable cash ofCHF20.3bn after which a sustainable c8.4% dividend (from 2018e) looks feasible

equivalent to a payout ratio of c 80% growing broadly in line with invested assets,

with improving operating leverage roughly offsetting likely margin pressure.

Limiting the UBS capital ratio to

13.6% implies a 11.9% yield 2015-

17e of which 7.9% is sustainable

and 4% special


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Figure 11: UBS dividend scenarios: conservative; targeting stable Basel 3 equity 2014-17e; long run sustainable dividend

CHF bn 2011 2012e 2013e 2014e 2015e 2016e 2017e Avg 2015-17e

RWAs 380 266 226 211 200 192 195

Basel 3 equity 25 25 27 29 29 30 31

Basel 3 equity as % RWAs base case 6.7% 9.3% 11.8% 13.6% 14.2% 15.4% 15.8%

Statutory Attributable CHF 4.2 -3.1 2.1 2.8 5.2 6.4 6.6

Underlying Attributable 4.3 3.8 4.6 5.2 5.5 5.8 6.0

avg #shares bn 3.8 3.8 3.8 3.8 3.796 3.8 3.8

Adj EPS 1.11 0.99 1.22 1.38 1.46 1.53 1.59

i) Base case

Payout ratio statutory 9% -18% 36% 68% 102% 84% 81%

Payout ratio underlying 9% 15% 16% 36% 96% 91% 88%

Dividend CHF bn 0.4 0.6 0.7 1.9 5.3 5.3 5.3

Announced DPS 0.10 0.15 0.20 0.50 1.42 1.42 1.42

Current share price 15

Implied yield 0.7% 1.0% 1.3% 3.3% 9.5% 9.5% 9.5% 9.5%

ii) DIV for unch. Capital fro m 2014Basel 3 equity 25 25 27 29 27 26 25

Basel 3 equity % 6.7% 9.3% 11.8% 13.6% 13.6% 13.6% 13.0%

Payout ratio underlying 9.0% 15.1% 16.4% 36.2% 120% 127% 104%

Dividend CHF bn 0.4 0.6 0.7 4.8 6.6 7.4 6.3

DPS 0.10 0.15 0.20 0.50 1.75 1.95 1.66

Implied yield 0.7% 1.0% 1.3% 3.3% 11.7% 13.0% 11.1% 11.9%

iii) Sustainable Dividend


RWAs 200 192 195

Assumed RWAs Growth 5% 5% 5%

RWA Growth CHF bn 10 10 10

Cap. Consumption @13% 1.3 1.3 1.3

Implied Payout ratio 76% 78% 79%

Implied DPS 1.1 1.2 1.3

Implied Yield 7.4% 8.0% 8.4% 7.9%

Source: Liberum Capital estimates

CS base case: cash dividend yield of 4.7% by 2015e

For CS the capacity to distribute cash is less impressive due to lower returns andless reduction in capital requirements. That said, our base case forecast of

2015e DPS of CHF 1.15 (underlying payout ratio of 42%) is still equivalent to a

4.7% yield.

Alternatively solving for a steady 11.0% Basel 3 equity ratio (the YE13e level)implies an average annual 8.6% yield over 2015-17.

For CS, we estimate the max sustainable yield to be 6.2% assuming 6% RWAgrowth (higher RWA growth than UBS given higher IB mix).

For UBS, in our base case despitepaying a dividend of CHF1.42 per

share from 2015e, yield of 9.5%,

the Basel 3 equity ratio continues

to climb to 15.8% by 2017e.

For UBS, solving for the dividend

required to keep the equity capital

ratio fixed at 13.6%, implies a

dividend of CHF 1.75 in 2015e and

an average yield 2015-17e of

11.9%

Assuming long run RWA growth of

5% (c NGDP) implies a payout

ratio of 79%, sustainable long term

dividend yield of 7.9%, growing at

perhaps 4-5% per annum


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Figure 12: CS dividend scenarios: conservative; targeting stable Basel 3 equity 2014-17e; long run sustainable dividend

CHF bn 2011 2012e 2013e 2014e 2015e 2016e 2017e Avg 2015-17e

RWAs 339 299 277 285 295 304.3 313.4

Basel 3 equity 12 24 28 31 34 36.8 39.4

Basel 3 equity % 3.6% 8.2% 10.2% 11.0% 11.6% 12.1% 12.6%

Statutory Attributable CHF 1.6 3.1 3.5 3.9 4.2 4.4 4.6


avg #shares bn 1.2 1.6 1.6 1.6 1.6 1.6 1.6

Adj EPS 1.58 2.37 2.40 2.54 2.73 2.87 3.01

i) Base case

Payout ratio statutory 55% 32% 39% 41% 44%


Dividend CHF bn 0.9 1.0 1.4 1.6 1.8 2.0 2.1

Announced DPS 0.75 0.75 0.85 1.00 1.15 1.23 1.30

Current share price 24.38

Implied yield 3.1% 3.1% 3.5% 4.1% 4.7% 5.1% 5.3% 5.0%

ii) DIV for unch. Capital fro m 2014Basel 3 equity 12 24 28 31 32 33 34

Basel 3 equity % 3.6% 8.2% 10.2% 11.0% 11.0% 11.0% 11.0%


Dividend CHF bn 0.9 1.0 1.4 3.1 3.0 3.4 3.6

DPS 0.75 0.75 0.85 1.00 1.88 2.14 2.26

Implied yield 3.1% 3.1% 3.5% 4.1% 7.7% 8.8% 9.3% 8.6%

iii) Sustainable Dividend


RWAs 285 295 316.1 338.2

Assumed RWAs Growth 6% 6% 6% 6%

RWA Growth CHF bn 17 18 19 20

Cap. Consumpt ion @11% 1.9 1.9 2.1 2.2

Implied Payout ratio 51% 53% 52% 52%

Implied DPS 0.75 0.75 0.85 1.3 1.5 1.5 1.6

Implied Yield 3.1% 3.1% 3.5% 5.4% 6.0% 6.2% 6.4% 6.2%


As a summary comparison, Figures 13 and 14 illustrate that UBS is likely to return

significantly more cash over the next 5 years under the various scenarios.

Figure 13: UBS dividend yield scenarios Figure 14: CS dividend yield scenarios

0.0%

5.0%

10.0%

15.0%

2 01 1 2 012 e 20 13 e 2 014 e 20 15 e 2 016 e 20 17 e

ba se c ase ma in ta in 1 3.6 % ca pita l s us ta in abl e

0.0%

5.0%

10.0%

15.0%

2011 201 2e 20 13e 2 014e 2015e 201 6e 20 17e

b ase cas e ma intain 11% capital s us tai nabl e

Source: Liberum Capital Source: Liberum Capital

Given UBSs significant cash generation, we see downside risk from potentiallyvalue destroying acquisitions. It remains to be seen whether management will

distribute the maximum appropriate level of capital to shareholders.

For CS, in our base case despite

paying a dividend of CHF1.15 per

share from 2015e, yield of 4.7%,

the Basel 3 equity ratio continuesto climb to 12.6% by 2017e

For CS, solving for the dividend to

keep the Basel 3 capital ratio at

11.0% in 2015e implies a dividend

of 1.88, yielding 7.7% and an

average 2015-17e yield of 8.6%

Assuming RWA growth of 6%

implies a payout ratio of 52% and

a sustainable yield of 6.2%

growing at perhaps 4%

UBS: Obvious future risk of

substantial cash generation

leading to complacency/ value-

dilutive M&A; manageable risk in

our view with the right

management incentives


11/47



Both UBS and CS undertaking significant cost saveinitiatives through 2015e likely to significantlyimprove PBT

UBS cost reduction plan, 2013-2015e Limited efficiency gains in 2012e: On an underlying basis UBS will increase

costs by CHF0.5bn in 2012 to CHF 22.5bn vs. 2011 adversely impacted by a

CHF0.6bn adverse FX move.

Mgmt target CHF4bn of cost saves by 2015e: From the 2012e cost run-rate ofCHF22.5bn, Management have committed to a further CHF4bn reduction by

2015 to cCHF18.5bn in 2015e, or CHF2.5bn net of CHF1.5bn of investment

spend.

We assume reduced investment spend due to weak revenues: Our own

forecasts assume underlying 2015e costs of 19.5bn (down CHF3.0bn from2012e), CHF0.5bn lower than management guidance in effect we are

forecasting that management will cut back on investment spend due to a weak

revenue environment. Our 2015e revenues are CHF1.1bn below consensus and

our 2015e EPS is conservatively 9% below Bloomberg consensus.

Our base case forecasts revenue-adjusted cost reduction of CHF2.3bn by2015e after changes in costs are adjusted for changes in revenues assuming a

marginal 75% cost income ratio vs. the 2012 run-rate.

Base case forecasted CHF3bn cost reduction looks achievable: equivalentto 13% of cost base and seems feasible given the planned 15% reduction in

headcount (10,000 staff) and also the IB business exits within credit and rates.

See figure 24 below for detailed analysis costs per employee by division for UBS.

CS cost reduction plan, 2013-2015e

Improved efficiency in 2012e: On an underlying basis CS reduced costs byCHF0.8bn in 2012e to CHF 20.3bn vs. 2011, reducing the clean cost income

ratio to 78% from the uncomfortably high 87% in 2011.

Management guide for CHF2bn reduction by 2015 (excluding variablecompensation) vs. 9M12 level. This would imply 2015e costs of c CHF18.3bn.

Our own forecasts assume underlying 2015e costs of 19.3bn down CHF0.9bn

from 2012e or CHF1.1bn higher than management guidance as we expectinvestment spend and other factors (such as e.g. regulatory spend, PAF3/ Bond

Plus etc) to significantly impact costs. As context, our 2015e revenues are

CHF4.7bn below consensus (admittedly small Bloomberg sample) and our EPS

is 8% below consensus. Reverse engineering this consensus implies consensus

2015e group costs of CHF23.2bn and a cost income ratio of 76% vs. our 74%

implying consensus cost reduction expectations (even revenue adjusted)

are lower than our own forecasts.

On a revenue adjusted basis where changes in costs are adjusted for changesin revenues assuming a marginal 75% cost income ratio, we forecast CS will

eliminate CHF1.0bn in costs by 2015e equivalent to 5% of total costs. This looksfeasible given

For UBS we assume CHF3bn of

cost reduction 2015e vs. 2012e

For CS we assume CHF0.9bn of

cost reduction by 2015e vs. 2012e.

Our 2015e CS cost income ratio of

74% is below an estimated

Bloomberg consensus 76%


12/47



opportunities to rationalise FICC, Underwriting and advisory business in

some geographies

scope to consolidate back office systems.

high 2012e starting point cost income ratio of 78%

progress being made: the CHF1.8bn of cost saving progress achieved in

2012 also point to further efficiency gains over 2013-2015.

Figure 15 summaries our cost forecasts for UBS and CS

Figure 15: Cost reduction plans absolute and revenue adjusted.

2010 2011 2012 2013 2014 2015 2016 2017 Cumul. FY13-15 inclusive

Clean Revenues

UBS 31.1 27.9 27.9 27.5 27.4 27.0 27.8 28.5

CS 30.4 24.4 25.7 25.6 25.5 25.9Clean Costs

UBS 23.9 22.0 22.5 21.2 20.3 19.5 19.9 20.4

CS 23.3 21.2 20.0 19.6 19.2 19.2

Cost income ratio

UBS 77% 79% 81% 77% 74% 72% 72% 71%

CS 77% 87% 78% 77% 75% 74%

Clean PBT

UBS 7.1 5.8 5.2 6.3 7.0 7.4 7.8 8.1

CS 7.2 3.1 5.5 5.7 6.1 6.5

Change in Clean PBT

UBS -1.3 -0.6 1.0 0.8 0.4 0.4 0.3 2.2

CS -4.1 2.5 0.2 0.3 0.4 1.0

Change in Revenues

UBS -3.1 -0.1 -0.4 -0.1 -0.4 0.8 0.8 -0.9

CS -6.0 1.3 -0.1 -0.1 0.4 0.2Change in costs

UBS -1.9 0.5 -1.3 -0.9 -0.8 0.4 0.5 -3.0

CS -2.1 -1.1 -0.4 -0.4 0.0 -0.9

Assumed incremental Cost income ratio

UBS 75% 75% 75% 75% 75% 75% 75%

CS 75% 75% 75% 75% 75% 75% 75%

Cost change due to Revenue Change

UBS -2.3 -0.1 -0.3 -0.1 -0.3 0.6 0.6 -0.6

CS -4.5 1.0 -0.1 -0.1 0.3 0.1

Revenue adjusted cost reduction

UBS 0.5 0.5 -1.1 -0.8 -0.5 -0.2 -0.1 -2.3

CS 2.4 -2.1 -0.3 -0.4 -0.3 -1.0


By YE15e UBS will have only 16% more staff than CS down from 30% currently

By 2015E UBS plans to have reduced head count by 15% to 54,000 down fromthe 3Q12 level of 63,700 mainly within the IB division where we estimate staff

reduction from 16,500 to 9,500 by YE15e.

By contrast Credit Suisse has publicly committed to staff cuts of only 2,000 fromthe 2Q11 levels, which were already largely complete by 3Q12 with a total staff

level of 48,400.

We estimate that Credit Suisse will cut a further 2,000 jobs by YE15e implyingtotal headcount of 46,400 (although CS has not given staffing level guidance-

Taking changes in revenue into

consideration we are forecasting

CHF2.3bn of cost reduction forUBS and CHF1.0bn for CS


13/47



apparently for legal reasons according to IR). We expect 1,500 of these cuts are

likely to be in the IB division (front and back-office)

By YE15e UBS will have only 16% more staff than CS down from 63% at YE08

and 30% at 3Q12e.

Figure 16: UBS headcount by division Figure 17: CS headcount by division

0

20

40

60

80

2008 2009 2010 2011 2012e 2013e 2014e 2015e

IB WM WMA R&C/ CIC GAM Centre

0

20

40

60

80

200 8 2009 2010 2011 2012e 2013e 201 4e 20 15e

IB WM R&C/CIC AM Centre

Source: Company Reports; Liberum Capital Source: Company Reports; Liberum Capital

Focusing on the change 2015 vs. 2012 shows a dramatic shrinkage in the IB head

count for UBS down 42% to 9,500 and down 7% for CS to 19,100.

Figure 18: UBS headcount changes Figure 19: CS headcount changes

010

20

30

40

50

60

70

Group Non IB IB

2012 2015

0

10

20

30

40

50

60

70

Group Non IB IB

2012 2015


Our divisional cost forecasts imply relatively stable revenues and costs per

employee

As the tables below illustrate our forecasts imply a modest 6% uptick in revenues

per employee in 2015e vs. 2012e, for both UBS and CS to CHF0.57m and 0.55m

respectively with costs/employee essentially flat at CHF 0.36m and CHF0.41m

respectively. Staff costs/employee are up modestly (5% for UBS, 1% for CS)

respectively.

Figure 20: UBS Group revenue and costper employee , CHF m

Figure 21: CS Group revenue and costper employee, CHF m

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Revenue Cost Staff cost

2012 2015

0.00

0.10

0.20

0.30

0.40

0.50

0.60


2012 2015


UBSs headcount is trending

towards that of CS: by 2015e UBS

will have just 16% more staff down

from 130% at 3Q12

UBS will IB staff by 42% by 2015

vs current levels.

We expect only 7% cuts for CS

Our assumed costs per employee

are relatively stable 2015 vs. 2012

with most of the savings from

headcount reduction


14/47



IB division revenue and costs per FTE are relatively stable

Looking at the IB divisions in more detail, we expect cost per FTE will decline by 2%

for UBS to CHF0.47m and decline by 1% for CS to CHF0.51m.

IB Revenues per FTE are expected to rise by 6% for UBS to CHF0.57m as lessprofitable areas are exited and by 1% for CS to CHF0.65m.

Figure 22: UBS IB division revenue andcost per employee

Figure 23: CS IB division revenue andcost per employee

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70


2012 2015

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70


2012 2015

Source: Liberum Capital Source: Liberum Capital

In 2012 CS IB staff are 20% more

productive than UBSs in revenue

terms but also 7% more expensive

in total cost terms and 4% more

expensive in terms of average

compensation


15/47



For completeness we include the full cost and revenue per FTE table for UBS:

Figure 24: UBS Divisional costs and revenues per FTE

Head co unt

'000s 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

IB 16.9 17.3 16.5 14.4 12.5 9.5 -42%WM 15.7 15.9 16.3 15.3 15.1 15.6 -5%

WMA 16.3 16.2 16.2 16.3 16.0 15.2 -6%

R&C/ CIC 12.1 11.4 10.2 9.6 9.8 9.8 -4%

GAM 3.5 3.8 3.8 3.6 3.4 3.4 -11%

Centre 0.2 0.3 0.5 0.5 0.5 0.5 0%

Total 64.6 64.8 63.6 59.7 57.2 54.0 -15%

Clean Cost by Division

CHF bn 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 5.0 4.9 4.8 4.7 4.8 4.9 1%

R&C/ CIC 2.1 2.1 2.1 1.9 1.9 1.9 -10%

GAM 1.5 1.3 1.4 1.3 1.3 1.3 -4%

IB 9.6 8.7 8.1 7.1 6.2 5.2 -36%

WMA 5.3 4.7 5.2 5.3 5.4 5.6 7%

Centre 0.4 0.3 0.8 0.9 0.7 0.6 -24%

Total 23.9 22.1 22.5 21.2 20.3 19.5 -13%

Staff cost by division

CHF bn 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 3.2 3.3 2.9 2.9 2.9 3.0 6%

R&C/ CIC 1.6 1.7 1.4 1.3 1.3 1.3 -2%

GAM 1.1 1.0 0.9 0.9 0.9 0.9 -2%

IB 6.5 5.6 4.9 4.3 3.8 3.2 -36%

WMA 4.2 3.8 4.3 4.4 4.5 4.6 7%

Centre 0.1 0.1 0.3 0.3 0.3 0.3 -10%

Total 16.8 15.4 14.6 14.1 13.7 13.3 -9%

Implied loaded Cost per FTE

CHFm 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 0.32 0.31 0.30 0.30 0.31 0.32 6%

R&C/ CIC 0.17 0.18 0.20 0.19 0.20 0.20 0%

GAM 0.44 0.37 0.36 0.36 0.37 0.39 7%

IB 0.59 0.51 0.48 0.46 0.46 0.47 -2%

WMA 0.32 0.29 0.32 0.33 0.34 0.37 14%

Centre 1.97 0.96 1.48 1.58 1.35 1.13 -24%

Total 0.37 0.34 0.35 0.36 0.35 0.36 2%

Implied staff cost per FTE

CHFm 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 0.20 0.21 0.18 0.18 0.19 0.20 11%

R&C/ CIC 0.13 0.14 0.13 0.14 0.14 0.14 9%

GAM 0.32 0.26 0.24 0.24 0.25 0.26 9%

IB 0.40 0.33 0.29 0.28 0.28 0.29 -1%

WMA 0.25 0.24 0.26 0.27 0.28 0.29 11%

Centre 0.13 0.30 0.72 0.54 0.51 0.49 -32%

Total 0.26 0.24 0.23 0.23 0.23 0.24 5%

Revenue by division

CHF bn 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 7.4 7.2 7.1 7.4 7.8 8.0 13%

R&C/ CIC 3.9 3.9 3.7 3.7 3.7 3.7 -1%

GAM 2.1 1.8 1.9 1.9 2.0 2.0 10%

IB 11.8 9.8 9.0 7.9 7.2 6.3 -31%

WMA 5.6 5.2 6.1 6.4 6.7 6.9 14%

Centre 0.4 0.0 0.0 0.0 0.0 0.0 nm

Total 31.1 27.9 27.9 27.5 27.4 27.0 -3%

Implied revenue per FTE

CHFm 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 0.47 0.46 0.44 0.47 0.51 0.52 18%

R&C/ CIC 0.33 0.33 0.35 0.38 0.38 0.38 9%

GAM 0.59 0.50 0.49 0.53 0.57 0.60 22%

IB 0.72 0.57 0.54 0.51 0.54 0.57 6%

WMA 0.33 0.32 0.38 0.40 0.42 0.45 19%

Centre nm nm nm nm nm nm nmTotal 0.48 0.43 0.43 0.45 0.47 0.49 12%

Source: Liberum Capital


16/47



And similarly for CS:

Figure 25: CS Divisional costs and revenues per FTE

Head co unt

'000s 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

IB 20.7 20.9 20.6 19.6 19.6 19.1 -7%WM 20.5 20.2 19.3 19.3 19.1 19.2 0%

R&C/CIC 5.1 5.0 4.8 4.9 4.9 4.9 2%

AM 2.9 2.7 2.8 2.7 2.5 2.3 -18%

Centre 0.9 0.9 0.9 0.9 0.9 0.9 0%

Total 50.1 49.7 48.4 47.4 47.1 46.4 -4%

129% 130% 131% 126% 122% 116%

Clean Cost by Division

CHF bn 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 7.2 7.0 6.2 6.2 6.2 6.2 -1%

R&C/CIC 1.0 0.9 1.0 1.0 1.0 1.0 4%

PB 8.2 7.9 7.2 7.2 7.2 7.2 0%

AM 1.8 1.6 1.6 1.5 1.4 1.4 -10%

IB 12.8 11.3 10.7 10.2 9.9 9.9 -8%

Centre 0.4 0.3 0.6 0.8 0.8 0.7 21%

Total 23.3 21.2 20.0 19.6 19.2 19.2 -4%

Staff cost by division

CHF bn 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 4.2 4.0 3.6 3.6 3.6 3.6 -1%

R&C/CIC 0.6 0.6 0.6 0.6 0.6 0.6 6%

PB 4.7 4.6 4.2 4.2 4.2 4.2 0%

AM 1.1 0.9 1.0 0.9 0.9 0.9 -14%

IB 8.0 6.7 6.3 6.0 5.8 5.8 -9%

Centre 0.3 0.1 0.3 0.5 0.5 0.4 nm

Total 18.9 16.9 16.1 15.8 15.5 15.5 -4%

Implied loaded Cost per FTE

CHFm 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 0.36 0.34 0.32 0.32 0.32 0.32 2%

R&C/CIC 0.19 0.19 0.19 0.20 0.20 0.20 4%

AM 0.61 0.57 0.57 0.55 0.54 0.59 3%

IB 0.64 0.55 0.51 0.51 0.50 0.51 -1%

Centre 0.52 0.33 0.65 0.84 0.84 0.79 nm

Total 0.46 0.43 0.41 0.41 0.41 0.41 0%

Implied staff cost per FTE

CHFm 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 0.21 0.20 0.18 0.19 0.19 0.19 2%

R&C/CIC 0.11 0.11 0.12 0.12 0.12 0.12 6%

AM 0.36 0.33 0.36 0.34 0.33 0.36 -1%

IB 0.40 0.32 0.31 0.30 0.29 0.30 -2%

Centre 0.36 0.12 0.35 0.50 0.50 0.44 nm

Total 0.39 0.34 0.33 0.33 0.33 0.33 1%

Revenue

CHFbn 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 9.8 9.0 8.6 8.8 9.0 9.2 7%

R&C/CIC 1.8 1.8 1.9 1.9 1.9 2.0 4%

AM 2.3 2.1 1.9 2.0 2.0 2.0 8%

IB 16.3 11.5 13.3 12.8 12.5 12.6 -6%

Centre 0.2 0.0 0.0 0.1 0.1 0.1 nm

Total 30.4 24.4 25.7 25.6 25.5 25.9 1%

Implied Revenue per FTE

CHFm 2010 2011 2012e 2013e 2014e 2015e 2015e/2012

WM 0.49 0.44 0.44 0.46 0.47 0.48 11%

R&C/CIC 0.36 0.36 0.39 0.40 0.39 0.40 4%

AM 0.77 0.77 0.69 0.72 0.76 0.85 23%

IB 0.81 0.55 0.64 0.64 0.64 0.65 1%

Centre nm nm nm nm nm nm nm

Total 0.62 0.49 0.52 0.54 0.54 0.55 6%



17/47



Relatively poor cost and RWA disclosure for CS

In analysing the differences in costs and revenues between CS and UBS, its

notable that CS doesnt provide staff costs (or RWA detail) for the WM and CIC

divisions within private banking. We have estimated the numbers to facilitate the

analysis.

The IB divisions of both CS and UBS destroy economicvalue after fully loading divisions for cost savings,central costs, below the line items, and regulation

In terms of presentation, both UBS and particularly CS flatter their divisionalresults by accumulating significant costs at the corporate centre and below

the PBT line. Any meaningful sum of the parts (SoTP) valuation methodology

has to allocate these centralised costs which are often at least partially ignored.

In addition, a SoTP valuation should reflect the impact of regulation such asDodd Frank (negative for derivatives revenues as standardised derivatives move

from relatively wide spread OTC trading to more transparent low margin

exchange trading) and ring fencing (increased funding costs due to reduced

implicit tax payer support) which will occur just beyond the explicitly

forecasted earnings time horizon but clearly still impact valuation.

In light of the above, we calculate 2013e fully adjusted divisional attributable

earnings and RoB3E for UBS and CS.

Since non equity minority interest charges relate to non equity regulatory capital,

they are allocated in proportion to Basel 3 RWAs. We also allocate central costs in

proportion to RWAs since these costs are largely proportional to balance sheet

usage. We also allocate approximately half of the forecasted cost savings by 2015e

to generate a more accurate normalised earnings run-rate for each division in

2013e- effectively estimating a fully normalised 2014e run-rate for attributable

earnings.

As figure 26 illustrates, for UBS the capital adjusted Group return on Basel 3 equity

(RoB3E) improves slightly to 22.4% on a fully loaded basis (due to cost savings)

from 20.4% unloaded, however the divisional RoB3Es decline. The investment bank

RoB3E declines to 5.5% (from 8.9%). On these numbers, shutting the UBS IB

division entirely would be value accretive for UBS (about CHF3.3bn of fair value

CHF0.9 per share before shutdown costs). However, arguably, profitability in the

wealth management and R&C divisions probably depend to some extent on the IB

depending on transfer pricing although UBS maintains all inter divisional

transactions are arms-length implying UBS could realistically close its IB without

impacting the earnings of its other divisions.

Relatively poor disclosure on staff

costs and RWAs from CS for the

Corporate and Institutional division

compared with UBSs for the Retail

and Corporate division

Both UBS and CS flatter their

divisional RoB3Es by shiftingexpenses and RWAs to the

corporate centre and by having

expenses below the line such as

preference share dividends and

earnings for unvested equity.

Shutting UBSs IB entirely would

be value accretive by about

CHF0.9 per share


18/47



Figure 26: UBS 2013e fully loaded divisional returns on Basel 3 equity at 10% Basel 3 equity gearing

CHF bn YE13

Basel 3RWAs

Capital

gearing

Capital U/L PBT Attri b

utableearnings

Unloaded

RoB3E

Reallocate

centrecapital

Adjusted

Allocatedcapital

Reallocate

centralcost,

minoritiesetc

Regulatory

impact*

Cost

saves*

Fully

loadedattrib

earnings

Loaded

RoB3E

Wealth Mgmt 19.3 10% 1.9 2.8 2.2 112.1% 0.1 2.0 -0.1 0.0 0.1 2.2 107.8%

Retail & Corporate 40.2 10% 4.0 1.8 1.4 34.7% 0.1 4.2 -0.3 0.0 0.1 1.2 28.3%

GAM 3.6 10% 0.4 0.6 0.5 134.5% 0.0 0.4 0.0 0.0 0.0 0.5 123.1%

Investment Bank 70.0 10% 7.00 0.8 0.6 8.9% 0.2 7.2 -0.5 -0.2 0.4 0.4 5.5%

Wealth Mgmt USA 26.4 10% 2.6 1.1 0.9 32.7% 0.1 2.7 -0.2 0.0 0.0 0.7 24.9%

Centre & MI** ex legacy 5.7 10% 0.6 -1.4 -1.1 -195.4% -0.6 - 1.1 0.0 0.0 0.0 nm

Legacy runoff 60.8 10% 6.1 0.2 0.2 3.0% - 6.1 0.0 0.0 0.0 0.2 3.0%

Subtotal 225.9 10% 22.6 5.9 4.6 20.4% 0.0 22.6 0.0 -0.2 0.6 5.1 22.4%

Excess capital - 2.5 0.0 0.0 1.0% - 2.5 0 0 0 0.0 1.0%

Total 225.9 25.1 5.9 4.6 18.4% - 25.1 0.0 -0.2 0.6 5.1 20.2%

*Net tax ; **MI: Equity minorities interest chargeSource: Company Reports; Liberum Capital

For CS, the fully loaded RoB3E declines to 13.0% vs. 13.8% as the regulatory

impact of minus CHF0.5bn exceeds forecasted savings of CHF0.3bn.

Figure 27: CS 2013e fully loaded divisional returns on Basel 3 equity at 10% Basel 3 equity gearing

CHF bn YE13eBasel 3RWAs

Capitalgearing

AllocatedCapital

U/LPBT

Attrib utable

earnings

UnloadedRoB3E

Reallocatecentrecapital

AdjustedAllocated

capital

Reallocatecentral

cost,minorities

etc

Regulatoryimpact*

Costsaves*

Fullyloaded

attribearnings

LoadedRoB3E

Wealth Mgmt 24.0 10% 2.4 2.5 1.9 77.6% 0.1 2.5 -0.1 0.0 0.0 1.8 70.0%

Corp and Institutions 48.7 10% 4.9 0.9 0.7 14.2% 0.2 5.1 -0.2 0.0 0.0 0.5 9.3%

Asset management 12.6 10% 1.3 0.5 0.4 27.8% 0.1 1.3 0.0 0.0 0.1 0.4 28.7%

Investment Bank 180.0 10% 18.0 2.6 2.0 10.9% 0.8 18.8 -0.71 -0.5 0.2 1.0 5.2%

Centre & BTL** 12.0 10% 1.2 -1.2 -1.0 -86.8% -1.2 - 1.0 0.0 0.0 0 nm

Subtotal 277.4 10% 27.7 5.2 3.8 13.8% 0.0 27.7 0.0 -0.5 0.3 3.6 13.0%

Excess capital - 0.5 0.0 0.0 1.0% 0 0 0 0.0 1.0%

Total 277.4 28.3 5.3 3.8 13.6% 0.0 -0.5 0.3 3.8 12.7%

*Net tax; **BTL: Below the Line


For CS, the loaded IB RoB3E of 5.2% implies the IB is destroying economic value.

On these estimates, shutting Credit Suisses IB division would boost Group fair

value by cCHF9.7bn (CHF6.1 per share). Net of shutdown costs we estimate

restructuring or closing the IB could generate value in the range CHF 1.9-3.0 /share

(8-15% of current share price)

Basel 3 capital calculation YE13 (for valuation

purposes): small surplus for both UBS and CS Libor risk: Our CS and UBS capital calculation used for valuation applies a

CHF1.5bn capital deduction to reflect potential LIBOR fines (for CS, UBS has

already incurred CHF1.4bn in fines and disgorgement) and litigation risk (both

UBS and CS) although CS is on only 3 Libor setting panels (USD, CHF and

EUR) and therefore is arguably less exposed than for example BARC which is on

at least 10 of the major LIBOR panels.

Our capital calculation implies a YE13e CHF2.5bn surplus for UBS andCHF0.5bn for CS relative to our assumed 10% imposed capital ratio target used

for valuation.

Although UBS will in reality will operate with a Basel 3 equity tier 1 in excess of13.0%, our valuation methodology assumes that the excess capital relative to

On a fully attributed basis and after

including future costs for regulatory

changes and also future efficiency

savings the implied IB RoB3E for

UBS and CS are 5.5% and 5.2%

respectively.


19/47



peers will be manifested in a lower cost of equity essentially viewing UBS as

operating with excess capital equivalent of c3% of RWAs or approximately

CHF6bn.

Figure 28: YE13e Basel 3 equity position fully loadedCHF UBS CS

Tier 1 capital 41.8 48.0

Hybrids and Pref shares -4.3 -8.9

Basel II Core Tier 1 (LIB Defn) 37.4 39.1

Deduct Minorities 0 -3.2

Include AFS reserves 0 0.0

Deferred tax -4.8 -5.4

Shortfall in provisions vs. exp. losses 0.0 0.0

Pension -3.8 0.0

Reverse securitis. deductions 50% 0.6 0.0

Impact Libor fines/ litigation -1.5 -1.5

Add back Basel 2 Fin Investments 0 0.0

Other -2.9 -0.7

B3 CET1 pre fin invest deductions 25.1 28.2Financial Investments 0 0

Max recognisable Fin Investments 2.5 2.8

Deduction of Fin Investments 0.0 0.0

Basel III equity tier 1 25.1 28.2

Basel 2.5 RWAs 163.3 239.6

CVA RWA increase n/a 92.6

Securitisation gross up n/a 0.0

Mgmt mitigation n/a -55.0

Basel III RWAs 225.9 277.2

Basel II Core Tier 1 22.9% 16.3%

Basel I II Equity T ier 1 inc luding Libor f ine and l it igat ion costs 11.1% 10.2%

Bus mix required capital estimate 10.0% 10.0%

Surplus capital 1.1% 0.2%

Surplus 2.5 0.5


SoTPs Valuation: 20% upside for UBS; 2% for CS

UBSs increased capital discipline implies re-rating: UBSs clear intention tocapital ration its value-destroying IB division to a maximum of CHF70bn in RWAs

increases the SoTP value of its other businesses in our view since more of the

value created is likely to reach shareholders justifying our 14.0x multiple for

Wealth Management and Asset Management earnings

CSs ongoing IB ambitions imply a 12% PE multiple discount to 12.5x (vs. UBS14.0x) for the Wealth Management and Asset Management divisions given the

likelihood/risk that free cash flow is diverted to the IB.

Figure 29 shows the capital and regulation adjusted sum of the parts valuationfor UBS. The Attributable earnings are taken from figure 26 while the YE13e

capital position is from Figure 28. The YE13e value per share is calculated and

then discounted to the present (10 months). We also add the 2012e announced

dividend paid in May 2013 as well as the announced 2013e dividend since its

deducted from the YE13e capital position. All central and below the line earnings

are allocated by division as well as capital held in the central division.

The YE13e fully loaded basel 3

capital level vs. a 10% target is a

key input to our SoTPS valuation.

We make a further adjustment to

the fully loaded Basel 3 capital

ratio of CHF1.5bn for both UBS

and CS to reflect incremental costs

related to Libor rigging both fines

and litigation risk.

UBS has lower risk of Wealth

management and asset

management cash flow being

malinvested in the IB (due to

smaller size and management

commitment to a max of CHF70bn

in IB RWAs). Therefore we

assume UBSs WealthManagement and Asset

Businesses merit a higher multiple

of 14.0x in the SoTPs vs. 12.5x for

CSs equivalent businesses.


20/47



For UBS we also apply a normalised tax rate of 22% (vs. the reported 15%or lower) and separately add the PV of UBSs unrecognised potential

deferred tax assets see figure 34.

Figure 29: UBS Sum of the Parts calculated at YE13e and discounted to present valueCHFbn Per Share

YE13e Basel 3

EquityCapital

required

Clean

attributable earnings

PE Clean

YE13eValue

Cost to

achieve*

Un-

recognisedUPDTA

YE13

value

PV Basel 3

EquityCapital

required

Clean

attributableearnings

Clean

YE13eValue

Re-

struccosts

Un- recog-

nised DTA

Present

Value/Share

Wealth Mgmt Swiss 2.0 2.2 14.0 30.1 0.0 0.5 30.6 28.4 0.5 0.6 7.9 0.0 0.1 7.5

Wealth Mgmt America 2.7 0.7 14.0 9.5 0.0 5.4 14.9 13.9 0.7 0.2 2.5 0.0 1.4 3.7

Wealth Mgmt combined 4.7 2.8 14.0 39.5 0.0 5.9 45.5 42.3 1.2 0.7 10.4 0.0 1.6 11.1

Retail & Corpor ate/ CIC 4.2 1.2 10.0 11.8 0.0 0 11.8 11.0 1.1 0.3 3.1 0.0 0.0 2.9

Asset Management 0.4 0.5 14.0 6.4 0.0 0.0 6.4 6.0 0.1 0.1 1.7 0.0 0.0 1.6

Investment Banking 7.2 0.4 9.0 3.6 0.0 1.6 5.2 4.8 1.9 0.1 1.0 0.0 0.4 1.3

Core total 16.5 4.9 12.6 61.4 0.0 7.5 68.9 64.2 4.4 1.3 16.2 0.0 2.0 16.9

Legacy 6.1 0.2 4.1 4.3 -3.5 0.0 0.7 0.7 1.6 0.0 1.1 -0.9 0.0 0.2

Surplus/deficit (+/-) 2.5 0.0 2.5 0.0 2.5 2.3 0.7 0.0 0.7 0.0 0.0 0.6

Total 25.1 5.1 13.4 68.2 -3.5 7.5 72.2 67.2 6.6 1.3 18.0 -0.9 2.0 17.7Dividends 12-13e 1.2 0.3

Fair value 68.4 18.0

Current market value 56.9 15.0

Implied upside 20% 20%

# shares bn 3.80

Ke 9%

time (years) 0.8

Current share price 15.00

*Cost to achieve: restructuring costs after YE13e and hence not reflected in YE13e equity capital


UBS SoTPs value by division: the Wealth and asset management business willaccount for 68% of UBSs 2013e earnings and 75% of fair value in our SoTP

(before considering unrecognised DTAs). The IB accounts for 32% of capital but

only 5% of group value.

CS SoTPs value by division: the Wealth Management businesses account for66% of value and 59% of earnings. The IB accounts for 68% of capital but only

22% of value.

Figure 30: Credit Suisse Sum of the Parts calculated at YE13e and discounted to present value

CHF bn Per share

YE13e Basel 3EquityCapital

required

Adjustedattributable

earnings

YE13ePE

CleanYE13eValue

Costs toachieve*

YE13value

PresentValue

Basel 3EquityCapital

required

Adjustedattributable

earnings

PE CleanYE13eValue

Coststo

achieve

YE13value

PresentValue

/Share

Wealth Mgmt. 2.5 1.8 12.5x 22.0 0.0 21.9 20.4 1.6 1.10 12.5x 13.7 0.0 13.1 12.7

Retail & Corp/ CIC 5.1 0.5 10.0x 4.7 -0.1 4.7 4.3 3.2 0.30 10.0x 3.0 0.0 3.2 2.7

Asset Management 1.3 0.4 12.5x 4.7 0.0 4.7 4.4 0.8 0.24 12.5x 3.0 0.0 2.8 2.7

Investment Banking 18.8 1.0 9.0x 8.9 -0.3 8.6 8.0 11.8 0.62 9.0x 5.5 -0.2 5.1 5.0

Total core 27.7 3.6 11.2x 40.3 -0.4 39.9 37.0 17.3 2.25 11.2x 25.2 -0.2 24.2 23.2

Surplus/deficit (+/-) 0.5 0.5 0.0 0.5 0.5 0.3 0.00 0.3 0.0 0.3 0.3

Total 28.3 3.6 11.4x 40.9 -0.4 40.5 37.6 17.7 2.25 11.4x 25.6 -0.2 25.3 23.5

Dividends 12-13e 2.4 1.5

Fair Value 40.0 25.0

Current Market value 39.0 24.4

Implied upside 2% 2%

# shares bn 1.60

Ke 9%

time (years) 0.8Current share price 24.4

*Cost to achieve: restructuring costs after YE13e and hence not reflected in YE13e equity capital


For UBS we include CHF2.0 per

share of value for unrecognised

potential deferred tax assets, whilenormalising the tax charge to 22%


21/47



UBS has a fair value per share of CHF18.0, 20% upside. CS has a fair valueper share of CHF25.0, 2% upside.

PE multiples for selected WM peers: As a rough cross check for the 14.0x

multiple applied to wealth management and asset management for UBS, figure31 shows the current PEx Julius Baer and Blackrock. While a highly limited

sample, the current average multiple of 15.5x suggests our 14.0x multiple is not

unreasonably high.

Figure 31: Current PE multiples for Julius Baer and Blackrock

10.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

18.00

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

BAER BLK Avg

*PEx calculate using Bloomberg consensus for next 12 month Rolling EPS and grossing up by 4% to estimate current PESource: Bloomberg

Wealth management peers trade

on c15.5x current consensus

earnings


22/47



BUY

UBSAddition by SubtractionPRICE: 15.0 | SWITZERLAND | BANKS | UBSN.VX | UBSN VX

In contrast to Credit Suisse, UBS has committed to radically

downsizing its FICC business with cuts in IB RWAs of 57% and cuts

in IB headcount of 42%. A dividend yield of 9.5-11.9% looks feasible

2015-17e. Our Sum of the Parts implies 20% upside, with the WM

businesses on a PE of 14.0x vs. WM peers on 15x. BUY.

Improving cost efficiency: Analysis of costs per employee bydivision shows that UBS is on track to achieve a CHF3bn reduction in

operating expenses by 2015e via headcount reduction of 10,000 of

which we estimate 7,000 will be in the investment bank. On that basis

we believe a Group cost income ratio of 72% is feasible by 2015 vs.

81% in 2012e, and still above Managements target range of 60-70%.

Significant capital release 9.5+% dividend yield by 2015e: FromYE12e-YE15e, UBS will reduce its Basel 3 RWAs by CHF 66bn

releasing 8.6bn of capital (at a 13% equity ratio) while also achieving

statutory earnings of CHF 10.1bn implying aggregate capital release

of CHF18.7bn - equivalent to 33% of the current market cap. We

expect UBS will exceed the 13.0% Basel 3 target by YE14e implying

increased capital distributions from 2015 onwards- equiv. to a c9-10%

yield while further increasing its Basel 3 equity to 15.8% by YE17e.

Unrecognised Potential Deferred Tax Assets (UPDTAs) ofCHF24.6bn with an est. present value of CHF7.5bn equivalent to 13%

of the current market cap. Our SoTPS assumes a normalised 22% tax

rate and adds the CHF7.5bn separately (note: CS has no UPDTAs).

UBSs 4Q12 profit warning offset by accelerated balance sheetshrinkage: The statement on 19

thDec guided to a CHF2.0-2.5bn

4Q12 attributable loss mainly due to Libor-rigging fines. However the

Basel 3 equity capital ratio stayed at c9.3% implying a cCHF35bnshrinkage in RWAs thereby broadly offsetting the valuation impact and

suggesting that UBS may reach the targeted CHF200bn of Basel 3

RWAs well ahead of the YE17e guidance.

UBS looks optically expensive on basic valuation metrics: 2013ePE 12.3x for p/TCE of 1.2x for RoTCE 10.9%; yielding 1.3% (UK

banks PE only 10.6x).

..but UBS is cheap on an adjusted basis: Adjusted for capital,regulation, UPDTAs and ex legacy assets, UBS trades on 2013e PE

10.0x; p/TCE 1.2x for RoTCE of 13.2% implying good relative

value. Our capital and regulation adjusted SoTPs target price of

CHF18.00 implies 20% upside. BUY.

Stock Data

Target Price (CHF) 18.00

52-Week Range (CHF) 9.69 - 15.62

Current price (CHF) 15.00

Shares Outstanding (bn) 3.75

Free Float (%) 91%Market Cap (CHF bn) 56.2

Avg daily volume (m) 11

*E=Liberum Capital Estimates

Stock Performance

7.0

9.0

11.0

13.0

15.0

17.0

Jan-12 Mar-12 Jun-12 Sep-12 Dec-12

UBS EURO Banks

Price Performance 1M 3M 12M

Price 15.0 12.0 11.1

Absolute 0% 25% 35%

Rel SMI -2% 19% 18%

Rel Eurobanks -6% 13% 1%Source: Bloomberg

Summary Financials & Valuation

Dec y/e (CHF bn) FY11A FY12E FY13E FY14ERevenue 29.8 25.6 27.5 27.4

Op Costs -22.4 -27.7 -21.2 -20.3

Impairments -0.1 -0.1 -0.1 -0.1

PBT 7.3 -2.3 6.3 7.0

Adj EPS, CHF 1.11 0.99 1.22 1.38

P/Adj EPS 13.6 15.1 12.3 10.9

DPS, CHF 0.1 0.2 0.2 0.5

Yield % 0.7 1.0 1.3 3.3

TCE/share, CHF 11.4 11.4 11.9 12.5

RoTCE % 10.5% 8.7% 10.4% 11.3%

P/TCE 1.31 1.31 1.26 1.20

Basel 3 RWAs 380.0 266.0 225.9 210.9

B3CET1* reportd (%) 10.7% 13.6% 17.8% 20.8%B3CET1* full load (%) 6.7% 9.3% 11.8% 13.6%Source: Liberum Capital estimates


23/47



UBSValuing UBS is relatively complex given that i) the group has a diverse group

of businesses ii) is currently undergoing a radical restructuring iii) has hidden

value due to Unrecognised Potential Deferred Tax Assets (UPDTAs).

We address the business mix via a sum of the parts approach see main sectionFigure 29. i) The restructuring is outlined below followed by ii) our estimate of the

present value of the UPDTAs iii) some comment on the 4Q12 profit warning

related to the libor rigging fines and iv) some brief commentary on the divisional

outlooks.

i) Summary of UBS restructuring plans: shrinkingbalance sheet, capital consumption and headcount

By way of background context, UBS plans to

Shrink its group funded balance sheet by 30% to CHF600bn by YE15e.

Reduce Basel 3 RWAs by 1/3rd

: from CHF301bn to below CHF 250bn

by YE13e and below CHF 200bn by YE17

Reduce headcount by 10,000 to 54,000 (-16%) with majority of the cuts

in the investment bank division. We estimate investment bank headcount

will decline from 16,500 at YE12e to 9,500 by YE15e (-42%).

Reduce operating costs by a further CHF4bn from the 9M12 annualised

run rate, CHF2.5bn net of CHF1.5bn in planned increased investment. Our

own forecasts assume net cost cuts of CHF3.0bn by YE15e to

CHF19.5bn, a 13% decline, forecasting curtailed investment due to weaker

than expected revenues- we are CHF1.1bn below consensus on 2015e

revenues and 9% below consensus EPS.

Exit FICC2

businesses within credit and rates which are unlikely to beat

their cost of capital under the new Basel 3 regulatory framework.

As a consequence of this restructuring, UBS guides that the reported Group RoE will

be in the 3-7% range in 2013 and 2014e implying annual 1-off restructuring costs of

CHF3.5bn (assuming a c 5% reported RoE) relating to redundancy payments,

losses on asset disposals etc. We factor this into our valuation (2013e impact

included in YE13e capital and 2014/15 impact included in SoTPs separately net oftax).

Smaller UBS balance sheet implies lower regulatory risk for UBS: The planned

shrinkage of UBS funded balance sheet from CHF900bn to CHF600bn by 2015e

will significantly reduce the valuation impact of any increase in RWA/Asset due to

revised regulatory guidance on RWA calculation e.g. moving to standardised

RWAs. This represents a key advantage vs. Credit Suisse in our view which will

operate with CHF300bn of RWAs (vs. UBSs CHF200bn).

UBS Cap-adjusted RoB3E rises to 26.0% by 2015e: As a consequence of these

changes we estimate that by 2015e, adjusted for regulation and after allocating

2 FICC: Fixed Income Currency and Commodities

UBS has committed to closing

many of its least profit IB

businesses thereby boostingeconomic profit for Shareholders

and more than doubling returns on

regulatory equity capital


24/47



capital at 10% of Basel 3 RWAs, UBS will achieve an underlying return on Basel 3

equity capital (RoB3E) of 26.0% up from 11.2% in 2012e; rising further to 30.3% in

2017e due to further capital shrinkage under conservative operational leverage

assumptions within the wealth management businesses.

Of course on an actual reported basis returns will be more lacklustre due to the

groups intention to operate at a 13% Basel 3 equity capital ratio, or higher, rather

than the 10% gearing discussed above. In addition looking at profitability in terms of

RoTCE further depresses returns due to several items included within equity (see

figure 8). So the underlying RoTCE without adjusting for capital will increase

only modestly from 8.7% in 2012e to 11.6% in 2017e.

In our base case, by 2017e, UBS will have a Basel 3 equity capital ratio of15.8%, implying a CHF11.2bn capital surplus vs. our 10% requirement.

Critical to our BUY investment case, is the assumption that equity investors will

take account of UBSs excess capital in the valuation and will assess its capital

position relative to international norms (we assume a 10% target) rather than

relative to UBSs own 13% target capital run rate.

The primary risk to our Buy case is the risk that UBS loses capital discipline onceit becomes highly cash-flow positive. We anticipate the tendency to expand the

business via M&A or via RWAs credit growth will be considerable which could

jeopardise our attractive dividend projections.

For sake of comparison, UBSs restructuring of its IB is more radical thanthe substantial changes made by RBS with RWAs down -57% vs. 31% for

RBS and Staff levels down 42% vs. 25% for RBS.

Figure 32: RWAs Pre and Post IBrestructuring, reporting CCY bn

Figure 33: IB Headcount Pre and Post IBrestructuring, 000s

0

50

100

150

200

RBS UBS

Before After

0

5

10

15

20

RBS UBS

Before After

Source: Liberum , Company reports Source: Liberum , Company reports

ii) Off balance sheet UPDTAs worth CHF7.5bnUBS has large Unrecognised Potential Deferred Tax Assets (UPDTAs) of

CHF24.6bn (3Q12), 43% of market cap, generated as a result of net operating

losses incurred during the 2007-2008 financial crisis. While not all of the UPDTAs

are likely to be successfully utilised before expiration, we estimate that CHF 14.7bn,

c60%, will be utilised. We estimate a present value for these of CHF7.5bn, or CHF2

per share, equivalent to 13% of current market cap.

Credit Suisse investor has no UPDTAs according to their investor relationsteam making this an often overlooked relative valuation factor in UBSs

favour.

UBSs IB restructuring is more

aggressive than that of RBS


25/47



Under the IAS 12 accounting standards, deferred tax assets (DTAs) can only be

recognised against probable future profits. UBS uses a 5 year time horizon for

recognition. Without unrecognised DTAs, UBS would have a normalised tax rate in

the range 20-25%. Our Sum of the parts assumes a 22% tax rate and then adds

the CHF7.5bn present value of the UPDTAs. Over 2010 and 2011, recognisingmore DTAs enabled UBS to pay an average tax rate of only 6.1% resulting in a per

annum boost to attributable earnings of c CHF1bn.

Figure 34 summarises our valuation of the UPDTAs: In the US the averageremaining life of the CHF18.8bn of UPDTAs is 16 years as of 3Q12. We estimate

the remaining life in Switzerland is 3 years (given a 7 year time limit and an

assumed 2008 inception). In the UK there is no time limit on utilisation. We apply

a relatively high discount rate in the US of 7.5% to reflect the constrained time

limit. By contrast in the UK, with no time limit on utilisation we apply a discount

rate of 3%. For the smaller RoW (rest of world) amounts of CHF 0.8bn we use a

higher 10% discount rate to reflect lack of information/uncertainty.

Figure 34: Estimating value of UBS Unrecognised Potential Deferred Tax Assets

CHF bn Unrecognised potential

DTAs

Relevantannual PBT

2014e

Tax rate Annualrelevant

payable tax

EstimatedAmountutilisedbefore

expiration

Amountutilised preexpiration

Est. date offull

utilisation

Remaininglife

Assumeddiscount

rate

PV ofunrecognise

d DTAs

PV/ MaxPotential

DTAs

Value pershare

US 18.8 1.4 35% 0.5 11.2 59% 2028 16 8% 5.1 27% 1.3

Switzerland 2.4 4.8 20% 1.0 0.5 22% 2015 3 2% 0.5 21% 0.1

UK 2.6 0.4 21% 0.1 2.63 101% 2039 Unlimited 3% 1.6 61% 0.4

RoW 0.8 1 22% 0.2 0.4 50% 2020 n/a 10% 0.3 42% 0.1

Total 24.6 7.6 23% 1.7 14.7 60% 7.5 31% 2.0


By way of illustration we show the more detailed workings for the largest,CHF18.8n, of US Unrecognised Potential Deferred Tax Assets: Beyond the

current 5 year measurement horizon which have already translated into on-

balance sheet DTAs (albeit at conservative levels), we estimate US taxable

earnings of CHF1.9bn (mainly from Wealth Management America but also the

IB) from 2018e, growing at 4% per annum.

In addition, prior to 2018e, we also consider the incremental PBT relative tothe current balance sheet DTA measurement assumptions. We understand

from previous CFO guidance (John Cryan) that the DTA measurement process is

highly conservative- taking substantial discounts to the actual management

business plan. On that basis, we assume that there will be incremental US

taxable annual earnings of CHF0.2-0.3bn within the current 5 year time horizon.

Discounting all the savings at 7.5% gives us a present value of CHF5.8bn for the

CHF18.8bn of US UPDTAs. An area of further investigation would be to what

extent UBS could utilise more of these US UPDTAs by enhancing US taxable via

M&A, incremental investment in its US franchise or other restructuring.

Due to large historical losses UBS

has more potential deferred tax

assets than it can recognise under

conservative accounting

standards. We estimate a PV of

CHF7.5bn for the off balance

potential deferred tax assets


26/47



Figure 35: Estimating present value of Unrecognised potential DTAs in United States

Years FWD Fin Yr Discount factor Assumed taxable earnings Tax saving PV @7% discount rate

1 2013e 0.93 0.2 0.1 0.07

2 2014e 0.87 0.3 0.1 0.09

3 2015e 0.80 0.3 0.1 0.08

4 2016e 0.75 0.3 0.1 0.085 2017e 0.70 0.3 0.1 0.07

6 2018e 0.65 1.9 0.7 0.44

7 2019e 0.60 2.1 0.7 0.44

8 2020e 0.56 2.2 0.8 0.43

9 2021e 0.52 2.4 0.8 0.43

10 2022e 0.49 2.5 0.9 0.43

11 2023e 0.45 2.7 1.0 0.43

12 2024e 0.42 2.9 1.0 0.43

13 2025e 0.39 3.1 1.1 0.42

14 2026e 0.36 3.3 1.2 0.42

15 2027e 0.34 3.6 1.2 0.42

16 2028e 0.31 3.8 1.3 0.42

Total utilised 32.0 11.2 5.1

Unrecognised potential DTAs 18.8

Assumed % utilised 59%


iii) 4Q12 profit warning related to the Libor Riggingfines offset by higher than expected RWA shrinkage

On 19Dec12, UBS announced an agreement to pay CHF1.4bn in fines anddisgorgement (of illegal profits) to US, UK and Swiss authorities. We

estimate reported 4Q12 PBT of minus CHF2bn, as a result of this fine (not tax

deductible) as well as other litigation provisions of CHF0.7bn, restructuring costs

of CHF0.5bn as well as fair value own debt losses CHF0.4bn (due to tighteningcredit spreads).

Excluding these items we estimate underlying 4Q12 PBT of positive CHF993mimplying an underlying adjusted EPS for full year 2012e of CHF0.99 after

normalising the tax rate to 22% and excluding STAB option gains of CHF337m in

9M12.

Unchanged capital adequacy despite 4Q12 reported attributable loss ofCHF 2.25bn: The UBS statement referred to a roughly unchanged fully Basel 3

equity tier 1 in 4Q12 vs. the reported 9.3% 3Q12 level. Assuming a 9.3% ratio at

end 4Q12 which implies a significant 4Q12 drop in Basel 3 RWAs of CHF35bn.

Accelerated restructuring: Based on the implied 4Q12 RWA shrinkage weexpect that UBSs balance sheet shrinkage will occur faster than 3Q12 guidance

with positive implications for capital release and dividends

iv) Group and Divisional P&L trends

Underlying EPS trend: We expect 23% and 13% underlying EPS growth toCHF1.22 and CHF1.38 in 2013e and 2014e respectively primarily driven by

strong PBT growth in the wealth and asset management divisions. We are 3%

above Bloomberg adjusted consensus in 2014e- see figure 5- (however

Bloomberg consensus has considerable noise with some estimates apparentlyincluding restructuring costs, where as we have excluded CHF3.5bn of 1-off

costs in 2013e and 2014e from adj. EPS so its likely in our view that underlying

consensus is considerably above the Bloomberg reported levels)

To the extent UBS can boost its

US pre tax earnings, it will be able

to maximise its CHF18.8bn of US

UPDTAs which we value currently

at CHF5.1bn

We estimate UBSs RWAs

declined by CHF35bn in 4Q12

which could indicate faster than

expected capital release going

forward.


27/47



Figure 36: UBS summary divisional PBT-underlying

% Ch

CHF bn 2011 2012e 2013e 2014e 2015e 2016e 2017e 2011 2012 2013 2014 2015 2016 2017

Wealth Mgmt 2.3 2.3 2.8 3.0 3.1 3.3 3.5 -3% -2% 22% 8% 5% 6% 6%

Retail & Commercial 1.7 1.6 1.8 1.8 1.8 1.8 1.7 -6% -3% 12% 0% -1% 0% -3%

Global Asset Management 0.5 0.5 0.6 0.7 0.7 0.8 0.8 -12% 11% 24% 11% 6% 4% 4%Investment Bank 1.1 0.9 0.8 1.0 1.0 1.0 1.1 -49% -15% -15% 29% 0% 1% 1%

Wealth Management USA 0.5 0.8 1.1 1.3 1.3 1.4 1.5 86% 75% 32% 14% 6% 6% 3%

Centre Core -0.2 -0.9 -0.8 -0.7 -0.6 -0.5 -0.5 -12% -15% -17% -11% -11%

Total Underlying PBT ex legacy 5.8 5.2 6.3 7.0 7.4 7.8 8.1 -19% -10% 20% 13% 5% 5% 4%

Corporate centre legacy assets 0.0 0.0 -3.5 -3.5 -1.0 0.0 0.0

Total U/L PBT 5.8 5.2 2.8 3.5 6.4 7.8 8.1 -19% -10% -47% 29% 81% 21% 4%

1-offs -0.4 -7.5 0.0 0.0 0.0 0.0 0.0

Reported PBT 5.4 -2.3 2.8 3.5 6.4 7.8 8.1

Group MI s -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3

U/L Attributable 4.2 3.8 4.6 5.2 5.5 5.8 6.0

EPS 1.11 0.99 1.22 1.38 1.45 1.53 1.59 -19% -11% 23% 13% 5% 5% 4%

Basel 3 RWAs 380 266 226 211 200 192 195

U/L Ro B3E at 10% CT1 11.2% 11.7% 18.8% 24.0% 26.9% 29.6% 31.2%


At a group P&L level we expect broadly flat revenues in 2012-2014e withdeclines in investment banking revenues broadly offset by increases in the

wealth and asset management divisions.

Group expenses: We forecast a CHF3bn decline in expenses by 2015e vs.2012e slightly ahead of the guided net of CHF2.5bn (CHF4bn of reductions and

CHF 1.5bn of investment spend) as we are relatively pessimistic on the revenue

outlook vs. consensus and we suspect management plans.

Figure 37: UBS Group P&L- underlying

% Ch

CHF bn 2011 2012e 2013e 2014e 2015e 2016e 2017e 2011 2012e 2013e 2014e 2015e 2016e 2017e

Revenues 27.9 27.9 27.5 27.4 27.0 27.8 28.5 -10% 0% -1% 0% -1% 3% 3%

Total expenses -22.0 -22.5 -21.2 -20.3 -19.5 -19.9 -20.4 -8% 2% -6% -4% -4% 2% 2%

PIP 5.9 5.4 6.3 7.1 7.5 7.9 8.1 -18% -9% 18% 13% 5% 5% 4%

Loan losses -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1

PBT (ex legacy) 5.8 5.2 6.3 7.0 7.4 7.8 8.1 -18% -10% 20% 13% 5% 5% 4%

1.3 0.9 0.8

Rev 1-offs 1.9 -2.3 0.0 0.0 0.0 0.0 0.0

Cost 1-offs -0.4 -5.2 0.0 0.0 0.0 0.0 0.0

1-offs 1.5 -7.5 0.0 0.0 0.0 0.0 0.0

PBT (ex legacy) 7.3 -2.3 6.3 7.0 7.4 7.8 8.1

U/L Attributable 4.2 3.8 4.6 5.3 5.5 5.8 6.0 -19% -11% 22% 13% 5% 5% 4%

Cost Income 79% 81% 77% 74% 72% 72% 71%

Basel 3 RWAs 380 266 226 211 200 192 195 0% -30% -15% -7% -5% -4% 1%

U/L Ro B3E at 10% CT1 11.2% 11.7% 18.8% 24.0% 26.9% 29.6% 31.2%


In wealth management we conservatively assume just 3.0% asset performancein 2013e (despite equity markets strong start YTD of 3-4%) and 2% in

subsequent years (which includes reinvested dividends and coupons) and also

conservatively assume net new money growth of only CHF25bn per annum (c3%

of invested assets) down from CHF30bn in 2012e.

We assume ongoing margin erosion down to 85bps vs. 2012e 90bps due to theongoing low yield environment and subdued client activity.


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We assume relatively tight cost control with the cost income ratio towards thebottom end of managements guided range of 60-70%.

Figure 38: UBS Wealth Management Division Underlying

% Ch

CHFbn 2011 2012e 2013e 2014e 2015e 2016e 2017e 2011 2012e 2013e 2014e 2015e 2016e 2017e

Revenues 7.2 7.1 7.4 7.8 8.0 8.4 8.8 -2% -1% 4% 4% 4% 5% 5%

Staff cost -3.3 -2.9 -2.9 -2.9 -3.0 -3.1 -3.3 3% -12% 1% 2% 3% 4% 4%

Other expenses -1.6 -2.0 -1.8 -1.8 -1.9 -1.9 -2.0 -9% 22% -11% 2% 3% 4% 4%

Total expenses -4.9 -4.8 -4.7 -4.8 -4.9 -5.1 -5.3 -2% -1% -4% 2% 3% 4% 4%

PIP 2.3 2.3 2.8 3.0 3.1 3.3 3.5 -3% -2% 22% 8% 5% 6% 6%

Loan losses 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Underlying PBT 2.3 2.3 2.8 3.0 3.1 3.3 3.5 -3% -2% 22% 8% 5% 6% 6%

Rev 1-offs 0.4 0.0 0.0 0.0 0.0 0.0 0.0

Cost 1-offs -0.1 0.2 0.0 0.0 0.0 0.0 0.0

1-offs 0.4 0.2 0.0 0.0 0.0 0.0 0.0

Reported PBT 2.7 2.5 2.8 3.0 3.1 3.3 3.5

PAT 1.8 1.8 2.2 2.3 2.4 2.6 2.7

Underlying attributable 1.7 1.6 2.0 2.1 2.2 2.4 2.5

Net new Assets 24 30 25 25 26 26 26 -293% 27% -16% 1% 1% 1% 1%

Performance -5.4% 6.7% 3.0% 2.0% 2.0% 2.0% 2.0%

Invested Assets 750 830 880 923 967 1,012 1,058 -2% 11% 6% 5% 5% 5% 5%

Margin (bps) 101 90 87 86 85 85 85

Cost Income 68% 68% 63% 61% 61% 61% 60%

Basel 3 RWAs 16.6 18.2 19.3 19.9 20.5 21.1 22.4

PBT/Avg RWAs 14.0% 13.1% 14.8% 15.3% 15.5% 15.9% 16.1%

U/L Ro B3E at 10% CT1 99% 93% 105% 108% 110% 113% 114%


In Retail and corporate: we assume flat revenues and some declines in costs(due to restructuring programme) with the cost income ratio towards the low end

of the guided 50-60% range.

Figure 39: UBS Retail and Corporate Division Underlying

% Ch


Revenues 3.9 3.7 3.7 3.7 3.7 3.7 3.7 -1% -4% 0% 0% 0% 0% 0%

Staff cost -1.7 -1.4 -1.3 -1.3 -1.3 -1.3 -1.4 3% -18% -1% -1% 0% 0% 2%

Other expenses -0.5 -0.8 -0.6 -0.6 -0.6 -0.6 -0.6 -1% 64% -24% 0% 0% 0% 3%

Total expenses -2.1 -2.1 -1.9 -1.9 -1.9 -1.9 -2.0 2% -1% -9% -1% 0% 0% 2%

PIP 1.8 1.6 1.8 1.8 1.8 1.8 1.7 -5% -8% 11% 0% -1% 0% -3%

Loan losses -0.1 0.0 0.0 0.0 0.0 0.0 0.0

Underlying PBT 1.7 1.6 1.8 1.8 1.8 1.8 1.7 -6% -3% 12% 0% -1% 0% -3%

Rev 1-offs 0.3 0.0 0.0 0.0 0.0 0.0 0.0

Cost 1-offs 0.0 0.2 0.0 0.0 0.0 0.0 0.0

1-offs 0.3 0.2 0.0 0.0 0.0 0.0 0.0

Reported PBT 1.9 1.8 1.8 1.8 1.8 1.8 1.7

PAT 1.3 1.3 1.4 1.4 1.4 1.4 1.3

Underlying attributable 1.2 1.1 1.3 1.3 1.3 1.3 1.2

Invested assets 848 361 374 387 401 415 429

Cost Income 55% 57% 51% 51% 52% 52% 53%

Basel 3 RWAs 33.1 38.4 40.2 40.9 41.5 42.2 42.9

PBT/Avg RWAs 4.9% 4.5% 4.6% 4.4% 4.3% 4.2% 4.1%

U/L Ro B3E at 10% CT1 35% 32% 32% 31% 31% 30% 29%


Asset Management:As in Wealth management we assume asset performanceof c2% per annum and some improvement in costs due to the restructuring

bringing the cost income ratio towards the middle of the guided 60-70% range.


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Figure 40: UBS Global Asset Management Division Underlying

% Ch


Revenues 1.8 1.9 1.9 2.0 2.0 2.1 2.2 -12% 4% 4% 3% 3% 3% 3%

Staff cost -1.0 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9 -14% -5% -2% -1% 1% 2% 2%

Other expenses -0.4 -0.5 -0.4 -0.4 -0.4 -0.4 -0.4 -9% 16% -7% -1% 1% 2% 2%Total expenses -1.3 -1.4 -1.3 -1.3 -1.3 -1.3 -1.4 -12% 1% -4% -1% 1% 2% 2%

PIP 0.5 0.5 0.6 0.7 0.7 0.8 0.8 -12% 11% 24% 11% 6% 4% 4%

Loan losses 0 0 0 0 0 0 0

Underlying PBT 0.5 0.5 0.6 0.7 0.7 0.8 0.8 -12% 11% 24% 11% 6% 4% 4%

Rev 1-offs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cost 1-offs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

1-offs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Reported PBT 0.4 0.5 0.6 0.7 0.7 0.8 0.8

PAT 0.4 0.4 0.5 0.5 0.6 0.6 0.6

U/L Attributable 0.3 0.4 0.4 0.5 0.5 0.5 0.6

Cost Income 75% 73% 68% 65% 64% 64% 63%

Basel 3 RWAs 3.6 3.5 3.6 3.7 3.8 4.0 4.1

PBT/Avg RWAs 12.8% 14.2% 17.5% 18.8% 19.4% 19.6% 19.9%

U/L Ro B3E at 10% CT1 91% 100% 124% 134% 138% 139% 141% Source: Liberum Capital

Investment Banking: We assume a sharp decline in FICC revenues cumulative 69% decline 2015e vs. 2012e as many credit and rates businesses

are exited with CHF90bn (pre 4Q12 disposals) of RWAs assets transferred to the

central legacy division to be run off. We assume equity revenues broadly flat

with some steady improvement in M&A ECM and DCM from current relatively

subdued levels.

IB cost income ratio is forecast to decline to 83%: still towards the top end ofthe guided range of 65-85%, resulting in PBT achieved of c CHF1bn and RoB3Eof c10.5% before adjusting for Dodd Frank etc.

We assume a CHF3.1bn or c69%

decline in FICC revenues 2015 vs.

2012


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Figure 41: UBS Investment Banking Division Underlying

% Ch


M&A ECM DCM 1.4 1.5 1.6 1.6 1.7 1.7 1.8 -43% 9% 4% 4% 4% 4% 4%

Equities 3.7 3.1 3.1 3.2 3.2 3.2 3.2 -17% -17% 2% 2% 0% 0% 0%

FICC 4.7 4.5 3.2 2.4 1.4 1.4 1.4 -4% -5% -28% -25% -42% 0% 0%Revenues 9.8 9.0 7.9 7.2 6.3 6.3 6.4 -17% -7% -12% -9% -13% 1% 1%

Staff cost -5.6 -4.9 -4.3 -3.8 -3.2 -3.2 -3.2 -14% -12% -13% -12% -16% 1% 1%

Other expenses -3.1 -3.2 -2.8 -2.4 -2.0 -2.0 -2.1 0% 4% -13% -15% -15% 1% 1%

Total expenses -8.7 -8.1 -7.1 -6.2 -5.2 -5.2 -5.3 -9% -6% -13% -13% -16% 1% 1%

PIP 1.1 0.9 0.8 1.1 1.1 1.1 1.1 -50% -16% -9% 30% 0% 1% 1%

Loan losses 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1

U/L PBT 1.1 0.9 0.8 1.0 1.0 1.0 1.1 -49% -15% -15% 29% 0% 1% 1%

Rev 1-offs IBD 0.00 0.0 0.00 0.00 0.00 0.00 0.00

Rev 1-offs Equities -1.9 -0.4 0.00 0.00 0.00 0.00 0.00

Rev 1-offs FICC -0.3 0.0 0.00 0.00 0.00 0.00 0.00

Rev 1-offs -2.1 -0.4 0.00 0.00 0.00 0.00 0.00

Costs 1-offs -0.2 -3.1 0.00 0.00 0.00 0.00 0.00

FVOD 1.5 0.0 0.00 0.00 0.00 0.00 0.00

1-offs -0.8 -3.5 0.00 0.00 0.00 0.00 0.00

Reported PBT 0.3 -2.5 0.8 1.0 1.0 1.0 1.1 U/L PAT 0.9 0.7 0.6 0.8 0.8 0.8 0.8

U/L Attributable 0.8 0.7 0.6 0.7 0.7 0.7 0.7

Cost Income 89% 90% 89% 85% 83% 83% 83%

Basel 3 RWAs 270.2 72.0 70.0 70.0 70.0 70.0 70.0

Clean PBT/Avg RWAs 0.4% 0.6% 1.1% 1.5% 1.5% 1.5% 1.5%

U/L Ro B3E at 10% CT1 2.8% 3.9% 8.0% 10.5% 10.4% 10.6% 10.7%


Wealth Management Americas (WMA) division: We assume relatively goodrevenues and positive jaws vs. slower growing expenses in 2013e driving strong

bottom line growth. Given the groups large but time-limited Unrecognised

Potential DTAs in the the US, we would expect driving PBT growth in the WMA

division to be a strategic imperative.

Figure 42: UBS Wealth Management Americas Division Underlying

% Ch

CHFbn 2010 2011 2012e 2013e 2014e 2015e 2016e 2017e 2011 2012e 2013e 2014e 2015e 2016e 2017e

Revenues 5.6 5.2 6.1 6.4 6.7 6.9 7.2 7.4 -6% 16% 6% 4% 4% 4% 4%

Staff cost -4.2 -3.8 -4.3 -4.4 -4.5 -4.6 -4.7 -4.9 -9% 12% 2% 2% 3% 3% 4%

Other expenses -1.1 -0.9 -1.0 -1.0 -1.0 -1.0 -1.0 -1.1 -15% 4% 1% 2% 3% 3% 3%

Total expenses -5.3 -4.7 -5.2 -5.3 -5.4 -5.6 -5

equity research: buy case on ubs; hold cs

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