Long-term ratings for UBS Group AG’s (UBS - Free Report) along with long-term senior unsecured debt and deposit ratings of its subsidiaries, including its principal bank subsidiary, UBS AG have been placed under review for upgrade by Moody's Investors Service.
UBS Group's Ba1(hyb) preferred stock ratings is also under review. Moreover, UBS AG's Aa3 long-term deposit ratings, A1 long-term issuer and senior unsecured debt ratings, baa1 Baseline Credit Assessment (BCA), baa1 Adjusted BCA and its Aa3(cr) Counterparty Risk (CR) Assessment are being reviewed for upgrade.
Factors to be Considered
The rating agency is taking into consideration the company’s efforts to cut exposure to capital intensive capital market activities along with volatile fixed income product lines. Moody’s feels that this has reduced the complexity of UBS Group’s investment banking business and has better aligned it with wealth and asset management businesses with greater focus on equities, foreign exchange and advisory segment. This restructuring will help combat the volatile earnings trend that the company has faced so far.
Further, Moody’s plans to review the group’s risk governance framework. The company’s business planning, capital allocation and distribution processes are restricted by the outputs of its board-approved capital management and stress testing framework, which requires the company to maintain a common equity Tier 1 (CET1) capital ratio of around 13%. Per the rating agency, weakening in the requirements of combined stress testing and its influence on limit setting and risk appetite or inconsistent application of UBS's risk governance throughout the various group segments would be regarded as credit negative.
Moody's would also be considering UBS Group’s ability to further improve its profitability levels or to sustain current levels under less favorable market conditions. Thus, Moody's will be reviewing the stability and earnings potential of the group's key earnings sources, i.e. its global wealth management and asset management businesses as well as its Swiss domestic universal banking businesses and investigate whether these would provide sufficient loss absorption capacity to mitigate the risks and earnings volatility related to the capital markets businesses.
UBS Group's current ratings are based on its still sizeable capital markets activities, the inherent volatility, risk opacity and confidence sensitivity within and of the capital markets-related client base, and moderate reliance on wholesale funding, which continue to restrictits credit profile. Despite reduction in exposure to capital markets-related risks, Moody's believes that potential additional litigation charges remain a key threat to the bank's improving profitability and in a highly adverse scenario, its solid capitalization. However, Moody’s is optimistic of the company’s move to create provisions for the U.S. residential mortgage-backed securitiesprobe,which reduces the risk that any additional provisions required could have a significant negative impact on earnings or capital.
Also, the rating agency is positive on the company’s strong liquidity profile, robust risk-based capital ratios and solid leverage ratios. Moody's anticipates UBS Group’s risk-based capital ratios to remain above its peers and expects the company to continue growing its capital stock and maintain solid capital ratios despite expected regulatory pressures over the next three to five years.
Factors That Can Trigger a Ratings Upgrade
UBS Group’s BCA can be upgraded if Moody’s feels that the company can improve or maintain its performance even under less favorable market conditions and if the risks from capital markets remain under control along with the group's capacity to absorb larger unexpected losses achieving a level such that those losses no longer risk diluting its strong capital position. Also, the company should continue to satisfy bondholders' and shareholders' interests while building upon its capital position.
The subsidiaries’ long-term senior unsecured debt ratings could be upgraded if the bank continues to issue and thereby maintain the current proportion of bail-in-able liabilities in relation to tangible banking assets, affording greater protection to the bank's senior creditors.
Factors That Can Trigger a Ratings Downgrade
Ratings can go down if there is lack in control or risk management or due to a significant decline in the Swiss economy. Also, if the bank was to materially increase its risk appetite by expanding the investment banking division or face a deterioration in its capital or liquidity profiles, ratings can be downgraded. The ratings could also face downward pressure if the bank fails to successfully execute the planned changes to its business models and not achieve the targeted return levels.
In a year’s time, the company’s share price has been up more than 11% on the NYSE underperforming 17.3% growth recorded by the industry.
UBS Group AG carries a Zacks Rank #5 (Strong Sell).
Stocks to Consider
DBS Group Holdings Ltd (DBSDY - Free Report) has witnessed 1.4% upward estimate revisions in the last 60 days. In a year's time, the company’s share price has gained about 50%. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
BanColombia S.A. (CIB - Free Report) carries a Zacks Rank of 2. Its earnings estimates for 2018 have been revised 7.3% upward over the last 60 days. Also, its shares have gained 16.3% in the past year.
The Bank of N.T. Butterfield & Son Limited (NTB - Free Report) carries a Zacks Rank of 2. The Zacks Consensus Estimate for the company has jumped 1.2% for the current year, in the last 60 days. Its share price has gained 43% in the past year.
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