Will Subdued Client Activity Adversely Impact UBS In Q1?

UBS (NYSE: UBS) is expected to publish its Q1 2019 results on April 25. This note details Trefis’ forecasts for UBS, as well as some of the key trends we will be watching when the company reports earnings.

How have UBS’ revenues changed over recent quarters, and what’s the forecast for Q1 2019?

• Total Revenues for UBS have largely trended lower over recent quarters. Revenues fell from CHF 8.2 billion in Q1 2018 to CHF 7.0 billion in Q4 2018. The decline can primarily be attributed to sub-par performance of Trading division towards the second half of FY 2018.
• We forecast UBS’ revenues to decline by 14.2% year-over-year to CHF 7.0 billion in Q1 2019, as negative market sentiment and subdued client activity continue to adversely impact UBS’ Investment Division revenues (constituting 27% of total revenues in 2018)

How have UBS’ total expenses changed over recent quarters, and what’s the forecast for Q1 2019?

• Total Expenses for UBS have remained fairly stable around CHF 5.9 billion over the last 12 quarters.
• We expect the trend to continue in Q1 2019.
• We estimate UBS’ total expenses to be CHF 5.8 billion for the quarter; a figure 4.6% lower than what it reported a year ago

Which are the key revenue and expense drivers to watch out for in UBS’ Q1 results?

Key Driver #1: Net Interest Income:

This represents interest earned through loans and other assets net of interest paid to deposits.

• Net Interest income has remained relatively stable over the past few quarters.
• However, this figure fell sharply in Q2 2018 due to higher funding costs for long-term debt and lower banking book interest income, partly offset by higher deposit revenues.
• We expect net interest income to be CHF 1.5 billion in Q1 2019, a figure 17.7% lower than what it reported a year ago.

Key Driver #2: Net Fee & Commission Income:

This income includes fees for general banking products, services and revenues from wealth structuring solutions and other asset management-related fees. Net Fee & Commission Income has been the largest contributor to UBS’ revenues over recent quarters, contributing approximately 59% of total revenues over 2018. We forecast the net fees to decline by 7.3% (y-o-y) to approximately CHF 4.4 billion in Q1’19.

Key Driver #3: Personnel Expense:

This includes salaries and benefits paid out to employees.

• Personnel Expense is the single biggest cost driver, and was roughly 53% of total revenues over 2018.
• We expect UBS to report CHF 4.0 billion of personnel expense in Q1 2019, 4.2% higher than what it reported in Q4 2018.

What is the impact of the uncertain macroeconomic environment on UBS?

• Brexit uncertainty and the escalating U.S.-China trade disputes have an adverse impact on investor confidence and client activity levels.
• These heightened global geopolitical and macroeconomic uncertainties are likely to weigh on UBS’ revenues, particularly its Trading Division revenues.
• Additionally, the low interest rate environment in many European countries is also adversely impacting UBS’ revenues, primarily from net interest income.

What will be the impact of the above on UBS’ EPS?

• We expect the earnings to be CHF 0.25 per share on an adjusted basis in Q1, which reflects a 39% decline from the prior year quarter.
• The fall in earnings will likely be due to lower revenues and lower net income margin.

We currently have a price estimate of $17 per share for UBS, which is almost 25% ahead of the current market price. We have summarized our quarterly and full year expectations for UBS based on the company’s guidance and our own estimates, on our interactive dashboard How Is UBS Likely To Have Fared In Q1?. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Financial Services Data here