Back to top

Image: Shutterstock

Strategic Buyouts Aid UBS Group AG (UBS), Legal Hassles Ail

Read MoreHide Full Article

UBS Group AG’s (UBS - Free Report) strong capital position and opportunistic expansion strategies will continue to aid financials. However, its net interest income (NII) might be persistently affected in the near term. Heightened regulatory supervision and a rising expense base are also concerning.

UBS has fortified its geographic footprint and expanded operations on the back of strategic partnerships and buyouts. In June 2023, UBS Group AG completed the acquisition of Credit Suisse (a regulatory-assisted deal) which is expected to enhance capabilities in wealth and asset management businesses.

Its wealth management joint venture (JV) with Japan’s Sumitomo Mitsui Trust Holdings (UBS SuMi TRUST Wealth Management Co.) and investment banking JV with Banco Do Brasil SA are likely to keep supporting its financials going forward. Moving ahead, a solid balance-sheet position gives the company an opportunity to undertake beneficial strategic acquisitions. This will aid long-term growth.

The firm has been displaying a strong capital position over the years. As of third-quarter 2023 end, common equity tier (CET) 1 capital ratio was 14.4% and CET1 leverage ratio was 4.9%. It aims to achieve CET1 capital ratio of around 15% by the end of 2026.

UBS is making efforts to become more digital and data-driven to provide clients with digital-first services. It established a leveling-up strategy based on five key pillars through Agile@UBS, quarterly business reviews and digital roadmaps, modern technology, automation and engineering excellence. It has also introduced an Artificial Intelligence, Data and Analytics center of expertise. These efforts are likely to provide UBS with a competitive edge over its peers.

However, its NII growth is likely to be under pressure in the near term due to tepid growth of the European economy. Additionally, wanting to invest into higher yielding assets, clients are reallocating deposits into money market funds and US government securities. This is likely to affect NII in the upcoming period.

UBS Group AG’s escalating expense base is concerning as it exposes the company to operational risks. The metric has been rising over the years. Going forward, investments in technology and inflationary pressures are likely to impede bottom-line growth. Also, management expects more than $1 billion of integration related costs in fourth-quarter 2023.

The company is subjected to operational challenges and legal hassles. In August 2023, it paid a civil penalty of $1.44 billion to the U.S. Department of Justice to resolve a long-running civil case against it regarding underwriting, issuance and sale of residential mortgage-backed securities that were issued in 2006-2007.

Moreover, post Credit Suisse’s acquisition, it has been facing class action suits and complaints from individual shareholders and former employees of Credit Suisse over an inadequate consideration. Such successive lawsuits are expected to increase costs, thereby adversely impacting the company’s profitability.

UBS’ capital distribution activities keep us apprehensive. In April 2023, a two-year share repurchase program of up to $6 billion was approved by shareholders, though the company has temporarily suspended buybacks due to Credit Suisse buyout. Its capital distribution activities seem unsustainable due to fluctuating quarterly performance and an unfavorable debt/equity ratio compared with the industry average.

Shares of this Zacks Rank #3 (Hold) company have gained 33.1% compared with the industry’s 7.8% growth over the past six months.


Zacks Investment Research
Image Source: Zacks Investment Research


Finance Stocks Worth Considering

A couple of better-ranked stocks from the finance space are Mitsubishi UFJ Financial Group, Inc. (MUFG - Free Report) and Itau Unibanco Holding S.A. (ITUB - Free Report) . MUFG and ITUB currently carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for MUFG’s fiscal 2023 earnings has been revised 5.4% upward over the past 60 days. The stock has gained 30.7% over the past six months.

The consensus estimate for ITUB’s 2023 earnings has remained unchanged over the past 60 days. The company’s share price has increased 16.7% over the past six months.

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

UBS Group AG (UBS) - free report >>

Itau Unibanco Holding S.A. (ITUB) - free report >>

Mitsubishi UFJ Financial Group, Inc. (MUFG) - free report >>

Published in