NEW YORK ( Trefis) -- UBS ( UBS) is a financial services firm that offers a strong combination of wealth management, asset management and investment banking services on a global and regional basis.

Its trading division accounts for about 40% of the $19.30 Trefis price estimate for UBS's stock, which is about 8% ahead of the current market price. UBS competes Morgan Stanley ( MS), JP Morgan ( JPM), Credit Suisse ( CS), and Goldman Sachs ( GS) in trading, investment banking and asset management services.

We have a $19.80 price estimate for UBS, which is about 8% ahead of the current market price.

Trading Assets Increasing

The relative increase of bonds, currencies and commodities (BCC) trading assets in the third quarter of fiscal 2010 from 2009 can potentially provide some insight on the outlook for these banks in terms of their sales and trading activities.

The trading assets for these businesses increase has varied from as high as nearly 20% by UBS and 17% by Deutsche Bank to only 3% by Citigroup. Goldman Sachs and Morgan Stanley and Credit Suisse have been on the conservative side with their BCC trading assets increase from 2009 being 8% and 12% and 11% respectively.

We consider the trading assets for banks as the fair value of their financial instruments, which they use for trading purposes. It reflects the proprietary capital they can leverage for generating returns.

For most of the investment banks we cover we have separated their sales and trading division into bonds, currencies and commodities trading and equities trading. Then we calculated their relative contribution to each of the banks' stock price and discovered that the trading division is one of the largest drivers to value for these banks when compared to other segments like M&A, equity underwriting and debt origination.

The above chart shows the change in trading asset bases for BCC from 2007 to the third quarter of last year. For most of the banks, the trading assets declined between 2007 and 2009, but recovered slightly in 2010. Though 2010 has been a better year, trading has been weighed down by sovereign debt risk and interest rate volatility in Europe. This has limited the increase in trading asset bases for many asset classes and impacted trading activities for the banks in the fourth quarter.

In 2006, among the above banks, UBS had the largest amount of BCC trading assets, totaling around $760 billion. However, this fell to around $220 billion by 2009, reflecting the poor performance of UBS, which was among the banks requiring significant amount of sovereign bailout funds.

However, the global economic environment is slowly improving and has led to an increase in volume and liquidity across most assets classes. As a result, we have seen an increase in the BCC trading assets for the above banks.

Since UBS has the heaviest exposure to trading, its stock price can be more vulnerable to the profits from its trading activities. The yield on trading assets for BCC for UBS decreased from 1.4% in 2005 to -8% in 2008, with the bank incurring heavy losses on its trading portfolio during the economic downturn, when returns across most major asset classes were sharply declining.

However, with the global economic environment slightly improving in 2009, the yield on trading assets for bonds, currencies & commodities rose to -0.25%. We expect the yield on trading assets for bonds, currencies & commodities to rise to nearly 5.2% towards the end of the Trefis forecast period, with the improving economic environment increasing liquidity and improving returns across asset classes.

If this however trended by 100 basis points higher to around 6.25% by the end of our forecast period, this would add around 10% to our price estimate.

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.