Why UBS Is Worth $17

by Trefis Team
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After reporting strong financial results in the first three quarters of 2018, UBS (NYSE: UBS) reported a soft financial performance in Q4, as net outflows from its cornerstone Global Wealth Management division coupled with a poor Investment Banking showing adversely impacted the bank’s top line. However, the bank’s annual revenue increased by 2% to $30.3 billion, while operating income surged by 19% to approximately $6.3 billion, primarily driven by the bank’s Global Wealth Management division’s decade-high pre-tax profit of $4.0 billion.

UBS’s IB division had a strong fiscal 2018 despite a poor performance in Q4. Pre-tax profit for the fourth quarter shrunk to $26 million as the convergence of macroeconomic and geopolitical concerns negatively affected client sentiment. We anticipate these Q4 trends to continue in the first half of 2019, leading to minimal growth in the bank’s IB revenues. However, improvements in market levels, as well as improvements in investor sentiment and client activity will contribute to mitigating revenue and profit growth headwinds towards the second half of fiscal 2019. 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 14.2% at the end of 2018. Taking all this into account, we currently have a price estimate of $17 per share for UBS, which is significantly 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 UBS’s Fiscal 2019 Outlook. 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.

Key Factors That Are Likely to Impact UBS’s Performance in 2019

Global Wealth Management Division Is Key To UBS’s Success

Global Wealth Management (constituting approximately 55% of company’s total revenues) had a strong fiscal 2018, reaching a decade-high pre-tax profit of $4 billion, driven by record results in net interest and recurring fee income. The division’s annual revenues increased by 4% to approximately $16.9 billion while its operating profit surged by 12% to reach $4.0 billion. However, this increase was partially offset by a 3.5% decline in total assets and subpar growth in net new money inflows. Net new money inflows were $24.7 billion compared with inflows of $44.8 billion in 2017. The net new money growth rate was 1.0% compared with 2.2%, and was below the 2018 target range of 2–4%. Going forward, as global economic activity continues to moderate, we expect net new money inflows to improve and drive overall top-line growth for the division.

Uncertain Macroeconomic Environment

Global markets were challenging, especially towards the end of 2018, with correlated volatility across equity indices, widening credit spreads, and a general lack of liquidity. Given this backdrop, there was a sharp fall in client activity levels which adversely impacted the bank’s revenues across all operating divisions. Further, management stated that lower invested assets as a result of market declines in the fourth quarter of 2018 are expected to affect recurring revenues in Global Wealth Management and Asset Management in the first quarter of 2019. Moreover, central banks normalizing (increasing) interest rates to pre-recession levels will likely weigh on the bank’s investment portfolio, which in turn will adversely impact security trading revenues. However, this increase is likely to have a positive impact on the bank’s net interest income (constituting approximately 25% of total revenues). Going forward, we expect UBS to continue to achieve sustainable growth despite the uncertainty in the macroeconomic environment.

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