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UBS AG Reiterated at Underperform

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On Jul 4, 2013, we maintained our long-term recommendation on UBS AG (UBS - Free Report) at Underperform, based on the company’s exposure to several claims and regulatory matters for which net charges for provisions for litigation are expected to remain at elevated levels at least through the remainder of 2013. However, the company returned to earnings in the first-quarter of 2013 as compared with the loss reported in the prior quarter.

Why Underperform?

While progress was made on many issues during 2012, many of the underlying challenges remain. Failure to achieve further sustained and credible improvements to the Eurozone sovereign debt situation, European banking system issues, unresolved U.S. fiscal issues, ongoing geopolitical risks and the outlook for growth in the global economy would continue to exert a strong influence on client confidence and, thus, UBS AG’S activity levels are expected to remain under pressure in 2013.

The Swiss Financial Market Supervisory Authority - FINMA has decided that banks using the internal ratings-based (IRB) approach shall apply a bank-specific IRB multiplier when calculating risk-weighted assets (RWA) for Swiss residential mortgages. Assuming no change in the portfolio size or other characteristics, this multiplier is expected to result in increased RWA of CHF 2–3 billion each year from 2013 through 2019 for UBS AG. This is apprehended to act as a headwind for the balance sheet of the company.

For UBS AG, over the last 60 days, the Zacks Consensus Estimate for 2013 declined 1.3% to $1.48 per share. For 2014, the Zacks Consensus Estimate dipped 1.6% to $1.80 per share, over the same time frame. Hence, UBS AG currently carries a Zacks Rank #4 (Sell).

Other Stocks to Consider

Some well performing foreign banks include Sumitomo Mitsui Financial Group Inc. (SMFG - Free Report) with a Zacks Rank #1 (Strong Buy), while Mizuho Financial Group, Inc. (MFG - Free Report) and Grupo Financiero Galicia S.A. (GGAL - Free Report) carry a Zacks Rank #2 (Buy).

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