Reiterating $19 Price Estimate For UBS Despite Lukewarm Q2

by Trefis Team
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UBS (NYSE:UBS) reported lukewarm results for the second quarter of the year earlier this week, as net outflows from its cornerstone wealth management division coupled with a one-time jump in interest expenses muted the impact of strong securities trading gains on the top line. We have summarized UBS’s Q2 2018 earnings and also detailed our expectations for the rest of the year in our interactive dashboard for the company, the key parts of which are captured further below.

Notably, the bank’s subpar wealth management performance stems primarily from sizable outflows in its operations in the Americas. We had forecast outflows for UBS’s Americas operations earlier this year when the Swiss banking giant announced plans to raise fees for its wealth management clients in the U.S. – and believe that this is likely to weigh on the division’s performance in Q3 2018 too. However, the new fee structure has helped UBS’s existing Americas business report higher revenues, while the ongoing efforts to streamline the wealth management business boosts profit margins. Additionally, UBS remains a strong player in the European securities trading industry, and it is also one of the best-capitalized banking giants in the world with a common equity tier 1 (CET1) capital ratio figure of 13.4% at the end of Q2 2018. Taking all this into account, we stick to our $19 price estimate for UBS’s stock, which is roughly 20% ahead of the current market price.

See our complete analysis of UBS here

The Trading Desks Continue To Perform Well

UBS has implemented drastic changes to its business model since 2012 in a bid to achieve sustainable profits in the stricter regulatory environment seen worldwide. Notably, UBS was the first global banking giant to announce plans to substantially shrink its fixed-income trading business – with plans to cut around 10,000 jobs announced back in 2012. The move has proven to be a good one for the bank, as it has helped it achieve the best capital ratio figure among all global banking giants without hurting returns. The credit for this primarily goes to the bank’s strong equities trading desk, which made the most of increased volatility in Q2 to churn out revenues of over CHF 1 billion for the second consecutive quarter. Moreover, the watered-down fixed income, currency and commodities (FICC) trading arm chipped in with more than CHF 500 million in revenues for the first time since Q1 2015.

Soft Wealth Management Showing Not A Long-Term Cause For Concern

The importance of UBS’s global wealth management operations as a part of its revamped business model is demonstrated by the chart above, which shows that the business contributes nearly 50% of the Swiss bank’s total value. Earlier this year, the bank announced plans to merge its two wealth management units – the one that focused purely on the Americas region (primarily the U.S.), and the one that included its other global operations (including its core unit in Switzerland) – into a single operating division with a goal to improve profit margins.

Notably, UBS reported a record CHF 2.37 trillion in total client assets for its global wealth management division at the end of Q2 2018.  This helped wealth management revenues remain nearly level at the record high seen in the seasonally strong first quarter. The bad news, however, was the net outflow figure of CHF 1.2 billion for the quarter. The outflows were due to a reduction in client assets by CHF 7 billion in the Americas (with most of this attributed to a single client), which nullified gains of CHF 4.4 billion in Switzerland and CHF 2.2 billion in the Asia-Pacific region. But as we pointed out earlier, these outflows were largely expected, given the recent fee hike by the bank. While we expect outflows to continue in Q3 and potentially in Q4 too, UBS should return to steady positive inflows into its Americas wealth management unit soon. This should help revenues grow at a faster rate than expenses in the long run.

We expect UBS to report EPS of CHF 1.37 for full-year 2018. Taken together with an estimated P/E ratio of 14 and a near-parity exchange rate between the CHF and USD, this works out to a price estimate of $19 for UBS’s shares, which is about 20% ahead of the current market price.

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