Tough Macroeconomic Environment Weighed On UBS’s Q1 Profits, But Things Should Improve Going Forward

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UBS (NYSE: UBS) released its Q1 2019 results late last week. The Swiss banking giant reported a 27% fall in income year-on-year due to macroeconomic headwinds on several fronts. Revenues came in at $7.3 billion, down 12% y-o-y while adjusted pre-tax profit (PBT) decreased 21% to $1.6 billion owing to sub-par performance across operating divisions. The bank’s Investment Banking division was hit the worst, with revenues falling nearly 20% y-o-y to $1.8 billion while PBT was down by 64%. Per Trefis estimates, UBS shares have a fair value of $17, which is roughly 25% ahead of the current market price.

We have summarized our full-year expectations for UBS in our interactive dashboard How did UBS Fare in Q1 and what’s the outlook for full-year 2019?. 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.

Performance of Key Revenue Segments In Q1

Global Wealth Management: This segment generates revenues by providing tailored investment advice and solutions to private clients, particularly ultra-high net worth and high net worth individuals globally. For Q1, the segment’s revenues declined to $4 billion (-10% y-o-y) while operating income shrunk to $873 million (-21% y-o-y). This can be attributed to a weakness across the industry even as a stronger dollar weighed on revenues. However, net new money remained strong at $22 billion thanks to strong inflows across the Asia Pacific region. Going forward, as global economic activity continues to improve, we expect net inflows to grow – driving top-line growth for the division.

Personal & Corporate Banking: This segment derives revenues by providing comprehensive financial products and services to private, corporate and institutional clients.  For Q1, the segment’s revenues grew to CHF 954 million (+3% y-o-y), with operating income remaining flat at CHF 385 million. Notably, revenues across all line items increased in this division, with the net interest income improving the most.

Asset Management:  This segment generates revenues by providing clients a fully-integrated asset management offering. For Q1, the segment’s revenues declined to $446 million (-5% y-o-y) with total invested assets falling slightly to $824 billion due to negative foreign exchange movements.

Investment Bank: Revenues for this segment are derived by providing services to institutional, corporate and wealth management clients to help them raise capital, grow their businesses, invest and manage risks.  The IB division had a terrible Q1:

  • Total revenue decreased to $1.8 billion (-10% y-o-y) while operating income shrunk to $207 million (-64% y-o-y) primarily because of the challenging trading environment in Europe and Asia. Most of this decline can be attributed to the equities trading desk, which saw a 22% decrease in revenues in Q1 due to lower levels of market activity and subdued trading volumes.
  • Investor sentiments in Q1 were hurt by concerns over slowing GDP growth and the uncertain geopolitical environment across major markets. However, going forward, we expect the IB division to achieve sustainable growth as market activity increases and investor confidence rebounds.

Outlook for Full-Year 2019

  • For the full year, we expect UBS’s revenues and net income margin to remain around the level in 2018, although the EPS is expected to increase to $1.40 thanks to the share repurchase program of the management.
  • We currently have a price estimate of $17 for UBS’s shares (which is roughly 25% ahead of the current market price) as we believe gradual improvement in market activity and client sentiment would have a positive impact on the all of the bank’s operating divisions.

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