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UBS Group's (UBS) Q3 Pre-tax Earnings Up on Lower Costs
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UBS Group AG (UBS - Free Report) reported third-quarter 2016 pre-tax operating profit of CHF 1.30 billion ($1.33 billion) on an adjusted basis, up 32.7% from the prior-year quarter.
While results reflected increase in net trading income, it witnessed a decline in net interest income and net fee and commission income. Notably, the quarter benefited from the company’s continued focus on expense management.
However, the Swiss banking giant’s net profit attributable to shareholders of CHF 827 million ($847.3 million) declined 60% year over year. The decline primarily reflects a net tax benefit of CHF 1.3 billion recorded in the prior-year quarter, while the company incurred a net tax expense of CHF 49 million in the reported quarter.
The company recorded reduced profitability in its Investment Bank and Wealth Management units. However, the quarter saw improved profitability in the Wealth Management Americas, Personal & Corporate banking and Asset Management wings.
Continued Cost Control Outweighs Revenue Pressure
Excluding the significant items, UBS Group AG’s adjusted operating income decreased 1.1% from the prior-year quarter to CHF 7.01 billion ($7.43 billion).
Adjusted operating expenses were down 6.5% year over year to CHF 5.71 billion ($5.85 billion). Expenses included provisions for litigation, regulatory and similar matters of CHF 419 million ($429.3 million), down 29.2% stable year over year. Notably, as of Sep 2016, UBS Group AG achieved net cost savings of CHF 1.5 billion and remains on track to achieve CHF 2.1 billion in net cost reductions by the end of 2017.
Business Division Performance
Wealth Management Americas division’s adjusted operating profit before tax jumped 29.2% from the prior-year quarter to CHF 358 million ($366.8 million). Notably, net new money growth in the quarter was 0.3%, up from 0.2% in the prior-year quarter.
Personal & Corporate banking division’s adjusted operating profit before tax was up 10.5% year over year to CHF 473 million ($484.6 million). Additionally, the Asset Management unit’s adjusted operating profit improved nearly 1% year over year to CHF 138 million ($131.4 million) in the quarter.
However , the company’s Investment Bank unit’s adjusted operating profit before tax came in at CHF 342 million ($350.4 million), down 44.3% from the prior-year quarter. Reduced debt and equity capital market revenues were partly offset by higher advisory revenues. Also, higher revenues from foreign exchange, rates and credit were more than offset by lower revenues in equities.
The Wealth Management division’s adjusted operating profit before tax declined 7.9% year over year to CHF 643 million ($658.8 million) in the quarter. However, driven by strong net inflows from Asia Pacific and Europe, the unit saw net new money growth of 4% in the quarter, significantly up from just 0.1% in the prior-year quarter.
Corporate Center reported adjusted operating loss before tax of CHF 654 million ($670.1 million) compared with a loss of CHF 1.17 billion in the prior-year quarter.
Capital Position
As of Sep 30, 2016, UBS AG's invested assets were CHF 2.75 trillion ($2.83 trillion), down 6.6% year over year. Total assets were CHF 935.21 billion ($965.1billion), decreasing 4.5% year over year.
UBS Group’s phase-in BIS Basel III common equity tier (CET) 1 ratio was 14.0% as of Sep 30, 2016, compared with 14.3% in the prior-year quarter. Further, phase-in BIS Basel III CET 1 capital decreased 8.1% year over year to CHF 37.21 billion ($38.4 billion) as of Sep 30, 2016. Fully applied risk-weighted assets increased 4.5% year over year to CHF 216.83 billion ($223.8 billion).
Outlook
Management warned that geopolitical tensions and underlying macroeconomic uncertainties have been contributing to client risk aversion and low transaction volumes and that the current scenario is unlikely to change in the near term. The company also highlighted several concerns including headwinds from negative interest rates. Further, the proposed changes to Swiss bank capital standards and global regulatory framework in Switzerland, will lead to higher capital requirements and expenses. However, amid a challenging operating environment, the company remains committed to the execution of its strategies.
Our Take
Results do not reflect a strong quarter for UBS Group as its major units failed to exhibit growth, but we remain optimistic as the company managed to sustain profitability amid a number of headwinds witnessed in the quarter. UBS Group remains focused on building its capital levels. Restructuring initiatives including cost control are encouraging.
However, year to date, UBS has lost more than 25% on the NYSE, reflecting investors’ concern amid a challenging operating environment with low sometimes even negative rate scenario and global economic slowdown.
Among other foreign banks, Barclays PLC (BCS - Free Report) reported third-quarter 2016 net income from continuing operations was £509 million ($668.2 million), up 5% from the year-ago quarter. Also, pre-tax earnings of £837 million ($1.10 billion) grew 35% year over year. Rebound in bond trading and encouraging investment banking performance were the primary reasons for improved earnings. Further, a rise in net interest income acted as a tailwind. However, these were not enough to support revenues, which continued to be hurt by disposal of assets. Also, a rise in credit impairment charges and higher operating expenses were the undermining factors.
Surprising markets, Deutsche Bank AG (DB - Free Report) reported net income of €278 million ($310.2 million) in third-quarter 2016, compared to a loss of €6 billion ($6.70 billion) in the prior-year period. Income before income taxes came in at €619 million ($690.6 million), as against a loss of €6.1 billion ($6.80 billion) in the year-ago quarter. Results largely benefited from strength in sales and trading (debt) revenues and the company’s continued cost-control moves. However, on the down side, the quarter recorded higher provisions.
HSBC Holdings plc (HSBC - Free Report) is expected to report results on Nov 7.
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UBS Group's (UBS) Q3 Pre-tax Earnings Up on Lower Costs
UBS Group AG (UBS - Free Report) reported third-quarter 2016 pre-tax operating profit of CHF 1.30 billion ($1.33 billion) on an adjusted basis, up 32.7% from the prior-year quarter.
While results reflected increase in net trading income, it witnessed a decline in net interest income and net fee and commission income. Notably, the quarter benefited from the company’s continued focus on expense management.
However, the Swiss banking giant’s net profit attributable to shareholders of CHF 827 million ($847.3 million) declined 60% year over year. The decline primarily reflects a net tax benefit of CHF 1.3 billion recorded in the prior-year quarter, while the company incurred a net tax expense of CHF 49 million in the reported quarter.
The company recorded reduced profitability in its Investment Bank and Wealth Management units. However, the quarter saw improved profitability in the Wealth Management Americas, Personal & Corporate banking and Asset Management wings.
Continued Cost Control Outweighs Revenue Pressure
Excluding the significant items, UBS Group AG’s adjusted operating income decreased 1.1% from the prior-year quarter to CHF 7.01 billion ($7.43 billion).
Adjusted operating expenses were down 6.5% year over year to CHF 5.71 billion ($5.85 billion). Expenses included provisions for litigation, regulatory and similar matters of CHF 419 million ($429.3 million), down 29.2% stable year over year. Notably, as of Sep 2016, UBS Group AG achieved net cost savings of CHF 1.5 billion and remains on track to achieve CHF 2.1 billion in net cost reductions by the end of 2017.
Business Division Performance
Wealth Management Americas division’s adjusted operating profit before tax jumped 29.2% from the prior-year quarter to CHF 358 million ($366.8 million). Notably, net new money growth in the quarter was 0.3%, up from 0.2% in the prior-year quarter.
Personal & Corporate banking division’s adjusted operating profit before tax was up 10.5% year over year to CHF 473 million ($484.6 million). Additionally, the Asset Management unit’s adjusted operating profit improved nearly 1% year over year to CHF 138 million ($131.4 million) in the quarter.
However , the company’s Investment Bank unit’s adjusted operating profit before tax came in at CHF 342 million ($350.4 million), down 44.3% from the prior-year quarter. Reduced debt and equity capital market revenues were partly offset by higher advisory revenues. Also, higher revenues from foreign exchange, rates and credit were more than offset by lower revenues in equities.
The Wealth Management division’s adjusted operating profit before tax declined 7.9% year over year to CHF 643 million ($658.8 million) in the quarter. However, driven by strong net inflows from Asia Pacific and Europe, the unit saw net new money growth of 4% in the quarter, significantly up from just 0.1% in the prior-year quarter.
Corporate Center reported adjusted operating loss before tax of CHF 654 million ($670.1 million) compared with a loss of CHF 1.17 billion in the prior-year quarter.
Capital Position
As of Sep 30, 2016, UBS AG's invested assets were CHF 2.75 trillion ($2.83 trillion), down 6.6% year over year. Total assets were CHF 935.21 billion ($965.1billion), decreasing 4.5% year over year.
UBS Group’s phase-in BIS Basel III common equity tier (CET) 1 ratio was 14.0% as of Sep 30, 2016, compared with 14.3% in the prior-year quarter. Further, phase-in BIS Basel III CET 1 capital decreased 8.1% year over year to CHF 37.21 billion ($38.4 billion) as of Sep 30, 2016. Fully applied risk-weighted assets increased 4.5% year over year to CHF 216.83 billion ($223.8 billion).
Outlook
Management warned that geopolitical tensions and underlying macroeconomic uncertainties have been contributing to client risk aversion and low transaction volumes and that the current scenario is unlikely to change in the near term. The company also highlighted several concerns including headwinds from negative interest rates. Further, the proposed changes to Swiss bank capital standards and global regulatory framework in Switzerland, will lead to higher capital requirements and expenses. However, amid a challenging operating environment, the company remains committed to the execution of its strategies.
Our Take
Results do not reflect a strong quarter for UBS Group as its major units failed to exhibit growth, but we remain optimistic as the company managed to sustain profitability amid a number of headwinds witnessed in the quarter. UBS Group remains focused on building its capital levels. Restructuring initiatives including cost control are encouraging.
However, year to date, UBS has lost more than 25% on the NYSE, reflecting investors’ concern amid a challenging operating environment with low sometimes even negative rate scenario and global economic slowdown.
UBS GROUP AG Price
UBS GROUP AG Price | UBS GROUP AG Quote
UBS Group currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Among other foreign banks, Barclays PLC (BCS - Free Report) reported third-quarter 2016 net income from continuing operations was £509 million ($668.2 million), up 5% from the year-ago quarter. Also, pre-tax earnings of £837 million ($1.10 billion) grew 35% year over year. Rebound in bond trading and encouraging investment banking performance were the primary reasons for improved earnings. Further, a rise in net interest income acted as a tailwind. However, these were not enough to support revenues, which continued to be hurt by disposal of assets. Also, a rise in credit impairment charges and higher operating expenses were the undermining factors.
Surprising markets, Deutsche Bank AG (DB - Free Report) reported net income of €278 million ($310.2 million) in third-quarter 2016, compared to a loss of €6 billion ($6.70 billion) in the prior-year period. Income before income taxes came in at €619 million ($690.6 million), as against a loss of €6.1 billion ($6.80 billion) in the year-ago quarter. Results largely benefited from strength in sales and trading (debt) revenues and the company’s continued cost-control moves. However, on the down side, the quarter recorded higher provisions.
HSBC Holdings plc (HSBC - Free Report) is expected to report results on Nov 7.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>