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UBS Group AG's Ratings Upgraded by Moody's, Outlook Stable

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Long-term ratings for UBS Group AG (UBS - Free Report) , along with long-term senior unsecured debt and deposit ratings have been upgraded by Moody's Investors Service — a rating arm of Moody’s Corporation (MCO - Free Report) . Notably, the outlook on the long-term deposit and senior unsecured ratings has been revised to stable from rating under review.

UBS Group AG's long-term deposit rating of Aa3 has been upgraded to Aa2, and A1 long-term issuer and senior unsecured debt ratings have been raised to Aa3. Both Baseline Credit Assessment (BCA) and Adjusted BCA of baa1 have been upgraded to a3.

Additionally, Counterparty Risk (CR) Assessment and Counterparty Risk Ratings of Aa3(cr) and Aa3 have been revised upward to Aa2(cr) and Aa2, respectively. Yet, UBS Group's Ba1(hyb) preferred stock ratings have been affirmed.

All this concludes the review for upgrade, initiated in April 2018 by Moody’s.

Rationale Behind Upgrade

The rating agency has taken into consideration the company’s efforts to cut exposure to capital intensive capital-market activities, along with volatile fixed income product lines. Moody’s believes this has reduced the complexity of UBS Group AG’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 which the company has faced so far.

Further, Moody’s reviewed 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, UBS Group AG’s improved credit profile is being supported by maturation and better embedding of its revised risk governance framework of the company’s various business segments.

Moody's also considered UBS Group AG’s ability to further improve its profitability levels or to sustain current levels under less favorable market conditions. Thus, Moody's concluded 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, will likely have sufficient loss-absorption capacity to mitigate risks and earnings volatility related to the capital market businesses.

Additionally, Moody’s believes UBS Group AG's significant incremental legal charges if any, will not negatively impact  its solid capitalization level and metrics as the company has improved its profits, and provisions recorded in previous years are sufficient to meet additional charges.

Also, the rating agency is positive on the company’s strong liquidity profile, robust risk-based capital ratios and solid leverage ratios. Moody's expects UBS Group’s risk-based capital ratios to remain above its peers. It also 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.

Shares of UBS Group AG have lost around 16.1% over the past six months on the NYSE compared with the 11.4% decline recorded by the industry.

Currently, the stock carries a Zacks Rank #4 (Sell).

Stocks to Consider

Bank of Montreal (BMO - Free Report) carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Its earnings estimates for 2018 have been revised 2.2% upward over the last 30 days. Also, its shares have gained 10.2% 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 3.5% for the current year, in the last 60 days. Its share price has gained 41.1% in the past year.

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