Bernstein Initiates Coverage On UBS, Credit Suisse At Underperform

Chirantan Barua of Bernstein initiated coverage on two large-cap Swiss banks, UBS Group AG (USA) (NYSE: UBS) and Credit Suisse Group AG (ADR) (NYSE: CS) with Underweight ratings.

Barua cited three fundamental concerns that fuel his bearish thesis.

Quantitative Easing

First, the quantitative easing (QE) rally that helped boost equity prices is now "petering out." The analyst noted that approximately 70 percent of assets under management growth in the past four years in private banking has been "performance driven," which "massively flattered the economics" of the private banks. Now, a "turn will be painful" for the fixed cost business with limited opportunities for taking out costs.

Meanwhile, there are signs that the world's richest individuals are now fleeing equities and keeping cash. This will hurt margins for the large banks as it did in 2007 and 2008 when gross margins fell more than 10 basis points.

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Valuation Concerns

Second, Barua stated that global valuations haven't yet "corrected"; the FICC refinancing period is over and corporates are deleveraging. And then there is the political risk that will likely continue through the end of the year.

All these factors are "unlikely to bring back the equity capital market," which is the most important area for Swiss banks. The analyst added that previous investment banking cycles lasted seven to eight quarters, and the current cycle just started, but revenue will be down 20 to 25 percent this year.

Barua suggested that Credit Suisse couldn't have "picked a worse macro environment" for its restructuring initiatives, and losses in investment banking will "enforce capital bears."

Capital Concerns

Finally, Barua stated Swiss banks were the first to push more capital through the banking system, and institutions like Credit Suisse boasts one of the lowest core capital levels across Europe on a clean leverage basis.

Meanwhile, Credit Suisse is "still reliant" on its Swiss IPO, deleveraging initiatives and earnings generation for "bridging the capital hole" but there is "significant risk" on all three.

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