This bank share is a money spinner and still a buy

It’s an ill wind that blows nobody any good and the ill wind that blew Swiss banking group Credit Suisse apart last year has certainly been good for arch rival UBS Group AG (SIX:UBSG), even if the Swiss government has erected a belated windbreak.

First-quarter results for Zurich-based lender and wealth manager UBS are naturally heavily distorted by the acquisition of Credit Suisse, producing a 75% leap in net profits from just over $1 billion to $1.76 billion. That was considerably better than analysts had expected, in fact nearly three times the level that had been forecast.

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Revenue also rose sharply, though by less than profits, by 46% to $12.7 billion. That was slightly better than the 42% rise in operating expenses. Wealth management fared particularly well in the first quarter, attracting $27 billion of net new assets. Investment banking also starred.

A double-edged sword was the fine performance by non-core operations acquired through the Credit Suisse deal. These assets are being sold off, so they will not contribute to future profits. On the other hand, they will prove very attractive to potential buyers.

As so often with mergers or acquisitions, cutting costs is the key to success, and the enlarged UBS chopped its combined bills by $1 billion in the quarter. It has already saved an impressive $5 billion and should have no difficulty in achieving its target of a further $1.5 billion by year end.

UBS was strongarmed into rescuing Credit Suisse by the Swiss Government but may not have been as reluctant as it made out at the time. UBS paid a knockdown price and ended up with an even more dominant position in Switzerland.

Admittedly, the merger has been particularly complicated and is taking some time to complete. A single US holding company will be achieved by the end of June and joint Swiss entities will be in place in the third quarter of this year.

With a seeming lack of gratitude, the Swiss government has imposed stricter financial strength requirements on the monster it has created, fearful that UBS truly is too big to fail. Its assets are twice the size of the entire country’s gross domestic product.

There were fears that meeting these requirements would restrict UBS in returning cash to shareholders. Also, the rest of this year will be a bit tougher as net interest will be reduced by a quarter-point lowering of interest rates in the country in March. However, the bank has declared a 70 US cents dividend and stuck to its previously announced plan for a $2 billion share buyback programme over the next two years.

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UBS shares slumped when the additional financial strength rules were introduced but shot higher after the first-quarter results. They now stand just above 27 Swiss francs (SFr), having pushed as high as SFr28.50 at the beginning of April. They stood at only SFr8 in the depths of the pandemic in March 2020, but it has been pretty much an upward journey ever since.

The price/earnings ratio is almost unbelievably low at only 3.5 while the yield is a reasonably decent 2.35%.

Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: While the best chance to buy UBS shares has long since gone, they still look remarkably cheap. An awful lot has to go wrong to justify the ridiculously low rating. While banking is an international business for an operation as large as UBS, it always helps to have a dominant position in your home market, and they don’t come more dominant than this one. Two recent dips found solid support at $24.50, and that level is unlikely to be tested again. This money spinner is still a buy. If you had the presence of mind to buy earlier, it is far too early to take profits.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.