Macroeconomic Headwinds Would Have Hurt UBS’s Q2 Results

UBS (NYSE: UBS) will kick-off the earnings season for European banks on Tuesday, July 23. After reporting a rather soft performance in Q1, the bank isn’t likely to do much better in Q2. Consensus estimates for UBS’s revenues for the quarter are close to $7.4 billion, which indicate an increase of roughly 2% on a sequential basis while EPS is expected to remain flat at $0.30. However, on a year-over-basis, revenue is expected to decline by 3.6% while EPS is projected to slide by more than 16%.

Trefis estimates that UBS’s stock has a fair value of $16.50, which is almost 35% ahead of the current market price. We have summarized our quarterly and full-year expectations for UBS’s earnings in our interactive dashboard. You can modify any of our key drivers to gauge the impact changes would have on UBS’s valuation, and see all Trefis Financial Services Data here.

A Quick Look At UBS’s Revenues

UBS reported $30.3 billion in Total Revenues in Fiscal 2018. This included 4 revenue streams:

• Global Wealth Management: $16.9 billion in FY 2018 (55% of Total Revenues). 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.
• Personal & Corporate Banking: $4.2 billion in FY 2018 (14% of Total Revenues). This segment derives revenues by providing comprehensive financial products and services to private, corporate and institutional clients
• Asset Management: $1.8 billion in FY 2018 (6% of Total Revenues). This segment generates revenues by providing clients a fully-integrated asset management offering
• Investment Bank: $8.1 billion in FY 2018 (25% of Total Revenues). 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.

A Quick Look At UBS’s performance with respects to its peers in recent quarters

• UBS under-performed its European banking peers Credit Suisse and HSBC in Q1 2019.
• HSBC witnessed a 5% increase in revenues while UBS’s revenues declined by nearly 12%. Moreover, UBS’s pre-tax profit plunged by 26% in Q1 while its European counterparts reported an increase in their pre-tax profits.

Key Factors To Watch for In Q2

Global Wealth Management Is Key To UBS’s Growth

• Global Wealth Management (GWM) is UBS’s largest division, accounting for more than 50% of its revenues. GWM had a lukewarm Q1, with the segment’s revenues declining to $4 billion (-10% y-o-y) while operating income shrunk to $873 million (-21% y-o-y). This can be attributed to weakness across the industry, made worse by the negative impact of a stronger dollar. However, net new money remained strong at $22 billion and invested assets increased by $172 billion (+8% y-o-y) thanks to strong inflows across the Asia-Pacific region.
• Going forward, as global economic activity continues to improve, we expect higher invested assets to lead to an increase in recurring revenues for the Global Wealth Management business.
• Moreover, steady positive inflows should help the division’s revenues grow at a faster rate than expenses in the coming quarters.

Investment Bank Struggles To Continue

• The IB division had a forgetful Q1, with total revenue falling 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. We expect the division’s struggles to continue in Q2.
• Escalating U.S.-China trade disputes as well as heightened global geopolitical and macroeconomic uncertainties are likely to have weighed on UBS’s trading revenues.
• Further, an escalating trade war is negatively impacting foreign exchange markets by shifting trade flows, and modifying expectations on growth and monetary policy.
• However, there has been an overall improvement in market activity and client sentiment in Q2. Taking all this into account, we expect the IB division to improve from its performance in Q1 although revenues will be lower than what it reported a year ago.

Trefis Price Estimate

• We currently have a price estimate of $16.50 for UBS’s stock, which is roughly 35% ahead of the current market price.
• We believe than an improvement in market activity and client sentiment will have a positive impact UBS’s operating divisions. This in turn should help boost UBS’s profitability in the near term – helping its stock price recover.

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