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UBS Group AG (UBS) Aided by Strategic Buyouts Amid High Costs
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UBS Group AG’s (UBS - Free Report) strong capital position, expansion strategies and business restructuring initiatives will continue to aid its financials. However, a rising expense base and increased litigation provisions will likely limit bottom-line growth in the near term.
Over the years, UBS Group AG’s strategic partnerships and buyouts, as well as its business optimization plans, have been supporting its financials. In June 2023, UBS completed the acquisition of Credit Suisse. This move is expected to enhance capabilities in wealth and asset management, as well as aid in growing its capital-light businesses. The company is on track to complete the integration process by 2026-end.
Pursuant to its business restructuring plans, it is likely to wind down its Non-Core and Legacy portfolio, releasing more than $6 billion of capital by 2026-end. Through these efforts, the company aims to achieve gross cost reductions of around $13 billion by 2026-end compared with 2022 levels. Further, it is targeting an underlying cost to income ratio of less than 70% during the same time frame.
UBS Group AG displays a strong capital position. As of fourth-quarter 2023-end, common equity tier (CET) 1 capital ratio was 14.5% and CET1 leverage ratio was 4.7%, both in excess of management guidance of around 14% and more than 4%, respectively. In fact, management forecasts to achieve an underlying return on CET1 capital ratio of approximately 15% and 18% by 2026-end and 2028-end, respectively.
UBS’ net interest income (NII) growth has been supporting its top line over the years. The metric recorded a compound annual growth rate (CAGR) of 7.6% over the last three years (ending 2023). Though lower rates are likely to affect NII this year, management expects that a decline in deposit costs will help the metric to recover from the second half of 2024.
However, an escalating expense base is concerning as it exposes the company to operational risks. The metric witnessed a CAGR of 17% in the three-year period ended 2023. Management expects to incur around $13 billion of integration-related expenses by 2026-end, out of which $4.5 billion has been incurred by fourth-quarter 2023-end.
UBS is subjected to operational challenges and legal hassles. In August 2023, the company paid a civil penalty of $1.44 billion to the U.S. Department of Justice to resolve a long-running civil case against it. Further, post Credit Suisse 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. Hence, an increase in claims against the company and regulatory fines over Credit Suisse’s dealings are expected to increase litigation provisions in the near term.
UBS Group AG’s capital distribution activities keep us apprehensive. Although the company targets to have a progressive dividend policy and to increase share repurchases in 2026 compared with 2022 levels, its fluctuating quarterly performance and an unfavorable debt/equity ratio compared with the industry average indicate that such capital distributions might not be sustainable.
Shares of this Zacks Rank #3 (Hold) company have gained 13.7% compared with its industry’s 8.3% growth over the past six months.
The Zacks Consensus Estimate for DNKEY’s 2024 earnings has been revised 8.4% upward over the past 30 days. The stock has gained 23.9% over the past six months.
The consensus estimate for DB’s 2024 earnings has been revised 1.3% downward over the past week. The company’s share price has increased 21.1% over the past six months.
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UBS Group AG (UBS) Aided by Strategic Buyouts Amid High Costs
UBS Group AG’s (UBS - Free Report) strong capital position, expansion strategies and business restructuring initiatives will continue to aid its financials. However, a rising expense base and increased litigation provisions will likely limit bottom-line growth in the near term.
Over the years, UBS Group AG’s strategic partnerships and buyouts, as well as its business optimization plans, have been supporting its financials. In June 2023, UBS completed the acquisition of Credit Suisse. This move is expected to enhance capabilities in wealth and asset management, as well as aid in growing its capital-light businesses. The company is on track to complete the integration process by 2026-end.
Pursuant to its business restructuring plans, it is likely to wind down its Non-Core and Legacy portfolio, releasing more than $6 billion of capital by 2026-end. Through these efforts, the company aims to achieve gross cost reductions of around $13 billion by 2026-end compared with 2022 levels. Further, it is targeting an underlying cost to income ratio of less than 70% during the same time frame.
UBS Group AG displays a strong capital position. As of fourth-quarter 2023-end, common equity tier (CET) 1 capital ratio was 14.5% and CET1 leverage ratio was 4.7%, both in excess of management guidance of around 14% and more than 4%, respectively. In fact, management forecasts to achieve an underlying return on CET1 capital ratio of approximately 15% and 18% by 2026-end and 2028-end, respectively.
UBS’ net interest income (NII) growth has been supporting its top line over the years. The metric recorded a compound annual growth rate (CAGR) of 7.6% over the last three years (ending 2023). Though lower rates are likely to affect NII this year, management expects that a decline in deposit costs will help the metric to recover from the second half of 2024.
However, an escalating expense base is concerning as it exposes the company to operational risks. The metric witnessed a CAGR of 17% in the three-year period ended 2023. Management expects to incur around $13 billion of integration-related expenses by 2026-end, out of which $4.5 billion has been incurred by fourth-quarter 2023-end.
UBS is subjected to operational challenges and legal hassles. In August 2023, the company paid a civil penalty of $1.44 billion to the U.S. Department of Justice to resolve a long-running civil case against it. Further, post Credit Suisse 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. Hence, an increase in claims against the company and regulatory fines over Credit Suisse’s dealings are expected to increase litigation provisions in the near term.
UBS Group AG’s capital distribution activities keep us apprehensive. Although the company targets to have a progressive dividend policy and to increase share repurchases in 2026 compared with 2022 levels, its fluctuating quarterly performance and an unfavorable debt/equity ratio compared with the industry average indicate that such capital distributions might not be sustainable.
Shares of this Zacks Rank #3 (Hold) company have gained 13.7% compared with its industry’s 8.3% growth over the past six months.
Image Source: Zacks Investment Research
Stocks Worth Considering
A couple of better-ranked stocks from the banking sector are Danske Bank (DNKEY - Free Report) and Deutsche Bank (DB - Free Report) , each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for DNKEY’s 2024 earnings has been revised 8.4% upward over the past 30 days. The stock has gained 23.9% over the past six months.
The consensus estimate for DB’s 2024 earnings has been revised 1.3% downward over the past week. The company’s share price has increased 21.1% over the past six months.