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UBS Group's (UBS) Q4 Earnings Rise Y/Y on Lower Expenses

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UBS Group AG (UBS - Free Report) reported fourth quarter and 2019 net profit attributable to shareholders of $722 million compared with $315 million in the prior-year quarter.

The company’s performance was supported by higher net interest income (up 3% year over year) along with rise in net fee and commission income (up 3%). Further, decline in expenses was a tailwind.

For full-year 2019, the company reported net profit attributable to shareholders of $4.3 billion, down 4.7% year over year.

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

Operating Income Climbs, Expenses Fall

UBS Group’s adjusted operating income increased 4.4% to $7.08 billion from the prior-year quarter.

Adjusted operating expenses fell 6.9% to $5.87 billion in the fourth quarter. Expenses included provisions for litigation, regulatory and similar matters of $104 million.

Business Division Performance

Global wealth management’s adjusted operating profit before tax came in at $787 million, up significantly year over year. Higher transaction-based income along with lower expenses supported results. Net new money outflows were $4.7 billion.

Asset Management’s adjusted operating profit surged 48% year over year to $187 million, supported by rise in net management and performance fees. Also, invested assets rose to $903 billion.

Personal & Corporate banking’s adjusted operating profit before tax was up 2% year over year to $309 million. Higher transaction-based income and recurring net fee income was partially offset by lower interest income. Annualized net new business volume growth for personal banking was strong at 2.8%.

Investment Bank unit’s adjusted operating profit before tax came in at $198 million against loss of $5 million in the prior-year quarter. Rise in Equities and FX, Rates & Credit revenues aided bottom-line growth. Decline in expenses was another tailwind.

Corporate Center incurred adjusted operating loss before tax of $273 million in the quarter.

Strong Capital Position

As of Dec 31, 2019, UBS Group's invested assets were $3.61 trillion, up 5.4% sequentially. Total assets decreased marginally to $972.2 billion.

UBS Group’s phase-in common equity tier (CET) 1 ratio was 13.7% as of Dec 31, 2019, compared with 12.9% on Dec 31, 2018. Phase-in CET 1 capital increased 2.6% year over year to $35.6 billion. Fully applied risk-weighted assets fell 1.7% to $259.2 billion.

Outlook

The company expects easing of monetary policy by the central banks to contribute to a strong performance in financial markets. Also, it expects a favorable credit environment and a partial resolution of trade disputes to mitigate slowing global economic growth.

While the macroeconomic and geopolitical situation remains uncertain, the company expects first-quarter 2020 to witness more seasonality, thereby supporting earnings. As clients are more active at present, UBS Group expects to earn higher transaction-related revenues. Higher asset prices are likely to have a positive effect on recurring fee income in its asset gathering businesses.

Recent Developments

UBS Group has announced plans to divest majority stake (51.2%) in UBS Fondcenter (Fondcenter) to Clearstream. Upon completion, Fondcenter will be combined with Clearstream's Fund Desk business, creating a top two B2B fund distribution platform with a presence in Europe, Switzerland and Asia.

UBS Group will initially retain minority (48.8%) share in the combined business. However, it plans to enter into an agreement to divest remaining stake to Clearstream in the future.

The transaction is expected to close in the second half of 2020. Upon closing, UBS Group expects to recognize a post-tax gain of about $600 million and a rise in CET1 capital by $400 million. Also, per the terms, the bank will deconsolidate Fondcenter and account for its minority interest as an investment in an associate.

Our Take

UBS Group’s fourth-quarter results seem impressive. Solid rise in profitability reflects the company’s restructuring and business simplification efforts. However, the negative interest rate environment and global concerns posed key headwinds.

UBS Group AG Price and Consensus

Currently, UBS Group carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other foreign banks, Deutsche Bank Aktiengesellschaft (DB - Free Report) will report results on Jan 30. Itau Unibanco Holding S.A. (ITUB - Free Report) and Mitsubishi UFJ Financial Group (MUFG - Free Report) will report on Feb 3.

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