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On Jan 15, 2014, we downgraded our recommendation on UBS AG (UBS - Analyst Report) to Underperform from Neutral based on the negative earnings estimate revisions over the last 30 days. Among the headwinds, the company’s third-quarter results were disappointing. We don’t expect any significant improvement in earnings in the upcoming quarters given the current challenges across the industry and the economy.

Why This Downgrade?

The Swiss banking giant has witnessed downward earnings estimate revisions over the last 30 days, pulling the Zacks Consensus Estimate for 2013 down by 1.6% to $1.25 per share. Also, for 2014, it declined 6.4% to $1.47 per share. This reflects analysts’ negative sentiment on the company’s fundamentals.

UBS AG’s third-quarter 2013 net income attributable to shareholders of CHF 577 million ($619.1 million) was substantially below the prior-quarter’s income of CHF 690 million ($731.8 million). Earnings for the quarter were primarily affected by higher net charges related to litigation, regulatory and similar matters. Notably, these net charges also increased during the nine months ended Sep 2013.

Further, UBS AG’s balance sheet is expected to be hit by the recent regulatory compliance that requires banks using the internal ratings-based (IRB) approach to apply a bank-specific IRB multiplier when calculating risk-weighted assets (RWA) for Swiss residential mortgages. This will lead to an increased RWA of CHF 2–3 billion each year from 2013 through 2019 for the company.

The absence of significant improvements in the European banking system and U.S. macro-economic issues could weigh on UBS AG’s financials in the upcoming quarters.   

However, UBS AG currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked foreign banks include BBVA Banco Franc (BFR - Snapshot Report), based in the Republic of Argentina, France based Societe Generale Group (SCGLY) and Bank of China Ltd (BACHY). Both BBVA Banco and Societe Generale carry a Zacks Rank #1 (Strong Buy) while Bank of China holds a Zacks Rank #2 (Buy).

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