A month has gone by since the last earnings report for UBS (UBS Quick QuoteUBS - Free Report) . Shares have lost about 11.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is UBS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

UBS Group’s Q2 Earnings Rise Y/Y on Lower Expenses

UBS Group AG reported second-quarter 2019 net profit attributable to shareholders of $1.39 billion, up nearly 1% from the prior-year quarter.

Notably, the company’s performance reflects lower expenses. Also, results were supported by rise in net fee and commission income (up 1% year over year), partially offset by lower net interest income (down 15%).

The company recorded higher profitability in Asset Management unit and Personal & Corporate banking on an adjusted basis. However, performance of Corporate Center, Global wealth management and Investment Bank units was disappointing.

Operating Income Declines, Expenses Drop

UBS Group’s adjusted operating income decreased 2% to $7.52 billion from the prior-year quarter.

Adjusted operating expenses edged down 2% to $5.74 billion in the second quarter. Expenses included provisions for litigation, regulatory and similar matters of $4 million.

Business Division Performance

Global wealth management division’s adjusted operating profit before tax came in at $886 million, down 12% year over year. Lower recurring net fee income due to margin compression and decline in net interest income affected results. Net new money outflows were $2 billion.

Asset Management unit’s adjusted operating profit rose 10% year over year to $135 million, supported by higher performance fees and rise in net management fees.

Personal & Corporate banking division’s adjusted operating profit before tax was up 11% year over year to $391 million. Higher transaction-based income, loan growth and lower expenses resulted in the upswing. Notably, annualized net new business volume growth for personal banking was strong at 4.4%.

The company’s Investment Bank unit’s adjusted operating profit before tax came in at $440 million, down 23% from the prior-year quarter. Challenging market conditions affected both Equities and FX, Rates & Credit revenues. Rise in expenses was another headwind.

Corporate Center incurred adjusted operating loss before tax of $65 million in the quarter.

Strong Capital Position

As of Jun 30, 2019, UBS Group's invested assets were $3.38 trillion, up 2% sequentially. Total assets increased 1% to $968.7 billion in the quarter.

UBS Group’s phase-in common equity tier (CET) 1 ratio was 13.3% as of Jun 30, 2019, compared with 13.4% on Jun 30, 2018. Phase-in CET 1 capital increased 2.4% year over year to $34.9 billion. Fully applied risk-weighted assets climbed 3% to $262.1 billion.

Outlook

As overall pace of growth has decreased due to the global slowdown, management expects political uncertainties and geopolitical tensions to affect the bank. Also, it noted that central banks across the world are indicating a reversal of monetary policy normalization and embarking on new stimulus measures.

A sharp drop in interest rates and expected rate cuts are likely to adversely impact net interest income. UBS Group’s regional and business diversification, along with higher invested assets benefiting recurring revenues, is expected to help offset this.

The company feels that an improvement in investor sentiment and higher market volatility could help offset the typical third-quarter seasonality.

Tax rate for the second half of 2019 is expected to be lower than 23.4% in the first half, reflecting the benefit of real estate asset transfers, subject to any potential DTA-related adjustments made as part annual business planning process.

NII is expected to be down sequentially on account of lower interest rates.
Second-half adjusted operating expenses, excluding litigation, are likely to be up slightly from the first half of the year.

Restructuring expenses of around $200 million are expected in 2019.

Management expects cost control actions to generate at least $300 million in cost saves incremental to its strategic actions, with most benefits coming through in the second half of 2019.

Excluding the impact of accounting asymmetries, hedge accounting ineffectiveness and litigation, UBS expects the Corporate Center loss to average around $250 million per quarter.

The company expects CET1 capital ratio to be between 12.7% and 13.3%. also, leverage ratio is anticipated to remain above 3.7%.

Financial Targets (2019-2021)

For the Group, UBS targets return on CET1 capital of nearly 15% in 2019 and adjusted cost to income ratio of 77%. Also, the same are expected to be nearly 17% and 72%, respectively, by 2021.

Business Divisions’ Outlook

Global Wealth Management: Net new money growth is expected in the range of 2-4% and adjusted Cost/Income Ratio of 75% and 70% in 2019 and 2021, respectively. Also, adjusted profit before tax is expected to grow 10-15%.

Personal & Corporate Banking: Adjusted pre-tax profit growth is expected in the range of 3-5%, net interest margin of 145-155 basis points and adjusted Cost/Income Ratio of 59% and 56% in 2019 and 2021, respectively.

Asset Management: Net new money growth excluding money market flows is expected in the range of 3-5% and adjusted Cost/Income Ratio is expected to be 72% and 68% in 2019 and 2021, respectively. Further, adjusted profit before tax is expected to grow about 10% in the medium term.

Investment Bank: Annual pre-tax return on attributed equity is expected to be greater than 15%. Adjusted Cost/Income ratio is expected to be 78% and 75% in 2019 and 2021,

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.