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On Dec 16, 2013, we reiterated our long-term recommendation on UBS AG (UBS - Analyst Report) at Neutral, based on the company’s strong capital base and its ongoing cost reduction programs. However, the company’s third-quarter earnings substantially lagged the prior-quarter figure. Further, given the stressed operating environment, we believe that a significant improvement in earnings would remain elusive in the coming quarters.

Why Neutral?

UBS AG’s disciplined expense management is a driving factor in the company’s long-term success. 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. Notably, the company achieved CHF 2 billion gross cost saving target this year, with CHF 2.2 billion in annual savings since the announcement.

UBS AG had a strong capital position as of Sep 30, 2013. Notably, Basel III common equity Tier 1 (CET 1) ratio increased by 70 basis points (bps) sequentially to 11.9%, surpassing the target of 11.5% to be achieved by the end of 2013. On a phase-in basis, Basel III CET 1 ratio was 17.5%, up 130 bps.

Further, as of Sep 30, 2013, risk-weighted assets decreased 27% year over year. A strong balance sheet will help the company in achieving its target of Basel III CET 1 ratio of 13% in 2014 and therefore, reinforce its commitment to a capital payout ratio that is greater than 50%.

At the start of the fourth quarter, most of the underlying challenges related to structural fiscal and economic issues lingered. Consequently, UBS AG’s client confidence and activity levels will likely continue to be affected by the absence of sustained and credible improvements, the eurozone crisis, banking sector-related issues and U.S. fiscal and monetary issues, along with a mixed outlook for global growth.

For UBS AG, over the last 60 days, the Zacks Consensus Estimate for 2013 declined 5.7% to $1.33 per share. For 2014, the Zacks Consensus Estimate decreased 3.0% to $1.62 per share, over the same time frame. Hence, UBS AG currently carries a Zacks Rank #4 (Sell).

Other Stocks to Consider

Some better-ranked foreign banks include Grupo Financiero Galicia S.A. (GGAL - Snapshot Report), BBVA Banco Franc (BFR - Snapshot Report) and Banco Santander, S.A. (SAN - Snapshot Report). While Grupo Financiero Galicia has a Zacks Rank #1 (Strong Buy), BBVA Banco Franc and Banco Santander carry a Zacks Rank #2 (Buy).

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