What Is UBS’ Fundamental Value Based On Expected 2019 Results?

by Trefis Team
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UBS (NYSE: UBS), after reporting strong results in the first three quarters of 2018, reported a weak financial performance in Q4. The bank’s net profit increased from CHF 1.2 billion in 2017 to CHF 4.9 billion in 2018, primarily due to a fall in the bank’s income tax expense of approximately 65% to CHF 1.5 billion in 2018. However, the bank’s total revenue declined in Q4 2018, mainly due to a decline in revenues from investment banking operations.

We anticipate these Q4 trends to continue in the first half of 2019, leading to minimal growth in the bank’s revenue in 2019. However, operating income is expected to increase due to a marginal decline in operating expenses. Tighter monetary policy, potential economic slowdown and escalating trade disputes between the U.S. and China are likely to adversely impact the company’s revenues across all divisions. We currently have a price estimate of $17 per share for UBS, which is ahead of the current market price. We have summarized our full year expectations for UBS, based on the company’s guidance and our own estimates, on our interactive dashboard Is UBS Fairly Valued?. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Financial Services company data here.

Impact of Tighter Monetary Policy

The U.S. hiked interest rates multiple times in 2018, and other European Central banks are also expected to increase interest rates in 2019. Interest rate hikes could lead to reductions in borrowing, and negatively impact UBS’ revenues from interest income – constituting approximately 20% of UBS’ total revenues. Reductions in borrowing could also adversely impact revenues from debt origination fees.

Impact on Investment Banking Division

UBS’ Investment Banking revenues declined by approximately 20% in Q4 2018, as market volatility increased, and escalating tensions between the U.S. and China negatively impacted global markets. Higher interest rates will likely weigh on growth of the U.S. economy, while China’s growth will also be negatively impacted due to pressure from U.S. tariffs. This is likely to impact global investor sentiment and could potentially even lead to a worldwide economic slowdown (though the chances remain remote). These factors are likely to negatively impact UBS’ revenues from the Investment Banking division, particularly Equity Trading Revenues and Equity Underwriting Fees. However, emerging market economies and the Eurozone present an opportunity for UBS to grow its revenues from investment banking in 2019.

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