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UBS (UBS) Down 10.5% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for UBS (UBS - Free Report) . Shares have lost about 10.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is UBS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

UBS Group’s Q1 Earnings Decline Y/Y on Lower Revenues

UBS Group AG reported first-quarter 2019 net profit attributable to shareholders of $1.1 billion, down 27% from $1.6 billion in the prior-year quarter.

Notably, the company’s performance in the quarter reflects lower expenses. However, results were affected by fall in net fee and commission income (down 13% year over year) and lower net interest income (down 22%).

The company recorded improved profitability in Asset Management unit and Personal & Corporate banking on an adjusted basis. However, performance of Corporate Center, Global wealth management and Investment Bank units was disappointing.

Operating Income Declines, Expenses Drop

UBS Group’s adjusted operating income decreased 12% to $7.2 billion from the prior-year quarter.

Adjusted operating expenses edged down 9% to $5.6 billion in the first quarter. Expenses included provisions for litigation, regulatory and similar matters of $8 million.

Business Division Performance

The Global wealth management division’s adjusted operating profit before tax came in at $873 million, down 21% year over year. Lower transaction-based revenues due to fall in client activity and decline in net interest income (NII) impacted the results. Net new money inflows were $22 billion in the first quarter.

The Asset Management unit’s adjusted operating profit rose 2% year over year to $109 million in the quarter under review, supported by higher performance fees along with reduced personnel costs.

Personal & Corporate banking division’s adjusted operating profit before tax was up 8% year over year to $389 million. Higher transaction-based income, NII growth and lower expenses resulted in the upswing. Notably, annualized net new business volume growth for personal banking was strong at 8%.

The company’s Investment Bank unit’s adjusted operating profit before tax came in at $221 million, down 64% from the prior-year quarter. Challenging market conditions affected both Equities and Corporate Client Solutions revenues. Notably, decline in expenses was a positive.

Corporate Center incurred adjusted operating loss before tax of $17 million in the quarter.

Strong Capital Position

As of Mar 31, 2019, UBS Group's invested assets were $3.3 trillion, up 7% sequentially. Total assets declined slightly to $956.6 billion in the quarter.

UBS Group’s phase-in common equity tier (CET) 1 ratio was 13% as of Mar 31, 2019, compared with 13.1% on Mar 31, 2018. Phase-in CET 1 capital decreased slightly year over year to $34.7 billion. Fully applied risk-weighted assets climbed 0.5% to $267.6 billion.

Outlook

As overall pace of growth has decreased due to the global slowdown, management expects economic growth and markets to recover and stabilize at varying speeds across regions and asset classes.

The company expects to benefit from its regional and business diversification. Higher invested assets are expected to boost recurring revenues in Global Wealth Management and Asset Management. Revenues are likely to benefit more if a sustained improvement in market activity and client sentiment across businesses is achieved.

Restructuring expenses of around $200 million are expected in 2019.

Effective tax rate of about 25% is estimated for 2019.

Management expects cost control actions to generate at least $300 million in cost saves incremental to its strategic actions, with most benefits coming through in the second half of 2019.

Also, for 2019, the company expects mid single digit growth in cash dividend, It plans to restart share repurchases in the second quarter.

Excluding the impact of accounting asymmetries, hedge accounting ineffectiveness and litigation, UBS expects the Corporate Center loss to average around $250 million per quarter.

The company expects CET1 capital ratio to be between 12.7% and 13.3%. also, leverage ratio is anticipated to remain above 3.7%.

Financial Targets (2019-2021)

For the Group, UBS targets return on CET1 capital of nearly 15% in 2019 and adjusted cost to income ratio of 72% by 2021.

Notably, the company plans to return CHF 2 billion to shareholders through a share buyback plan..

Business Divisions’ Outlook

Global Wealth Management: Net new money growth is expected in the range of 2-4% and adjusted Cost/Income Ratio of 75% and 70% in 2019 and 2021, respectively. Also, adjusted profit before tax is expected to grow 10-15%.

Personal & Corporate Banking: Adjusted pre-tax profit growth is expected in the range of 3-5%, net interest margin of 145-155 basis points and adjusted Cost/Income Ratio of 59% and 56% in 2019 and 2021, respectively.

Asset Management: Net new money growth excluding money market flows is expected in the range of 3-5% and adjusted Cost/Income Ratio is expected to be 72% and 68% in 2019 and 2021, respectively. Further, adjusted profit before tax is expected to grow about 10% in the medium term.

Investment Bank: Annual pre-tax return on attributed equity is expected to be greater than 15%. Adjusted Cost/Income ratio is expected to be 78% and 75% in 2019 and 2021,

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.


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