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 IncreasingThe 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.
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.
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