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On Sep 19, 2013, we upgraded our long-term recommendation on UBS AG (UBS - Analyst Report) to Neutral, based on the company’s strong capital base and the ongoing cost reduction programs. However, the company’s second-quarter earnings substantially lagged the prior-quarter’s income. Further, given the stressed operating environment, we believe any significant improvement in earnings would remain elusive in the upcoming quarters.

Why Neutral?

Maintaining cost discipline is significant for the long-term success of the company. UBS AG targets total cost savings of CHF 5.4 billion by 2015, including incremental cost savings of CHF 3.4 billion in addition to the CHF 2 billion cost-savings program announced in Aug 2011.

UBS AG exhibited a strong capital position as of Jun 30, 2013. Notably, Basel III common equity tier 1 ratio increased by 110 basis points sequentially to 11.2%, surpassing the regulator’s minimum 2019 requirement of 10% and expects to reach 11.5% by the end of 2013 and 13% by the end of 2014. Though Basel III risk-weighted assets increased marginally in the first half of 2013, these were reduced by 35% year over year in 2012. Therefore, further reduction in risk-weighted assets and a strong balance sheet will strengthen the company’s capital position.

The first half of 2013 reflected revenue growth and positive business flow for UBS AG, which continued to manage businesses effectively amid challenging market conditions.  However, the unresolved European sovereign debt and banking system issues, the U.S. fiscal issues and the mixed outlook for global growth in third-quarter 2013 could impact client confidence and business momentum.

For UBS AG, over the last 60 days, the Zacks Consensus Estimate for 2013 declined 6.1% to $1.39 per share. For 2014, the Zacks Consensus Estimate decreased 8.3% to $1.65 per share, over the same time frame. Hence, UBS AG currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some well performing foreign banks include Sumitomo Mitsui Financial Group Inc. (SMFG - Snapshot Report), Banco Bilbao Vizcaya Argentaria, S.A. (BBVA - Snapshot Report) and Grupo Financiero Galicia S.A. (GGAL - Snapshot Report). All three companies carry a Zacks Rank #1 (Strong Buy).

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