After 85% Growth, UBS Stock Doesn’t Have Much To Offer

UBS: UBS logo

[Updated 11/27/2020] UBS Update

UBS stock (NYSE: UBS) has gained 85% since the March bottom and at its current price of just below $15 per share, it is marginally lower than its fair value of $15 – Trefis’ estimate for UBS’s valuation. UBS, the world’s largest wealth manager, surpassed the consensus estimates in its recently released third-quarter results. Further, it was the most profitable third quarter for the bank over the last decade, with the bank’s profits surging by nearly 100% y-o-y to $2.1 billion while its revenues grew by 26% to $8.9 billion. Its Investment Bank division had a remarkable quarter which saw its profits surge by 265% while revenues grew by a stellar 43% led by a 42% gain in the securities trading business. Notably, UBS’s growth in profits could be attributed to a 51.2% stake sale in Fondcenter AG to Clearstream, resulting in pre-tax gains of $631 million. Moreover, UBS’s operating income surged by 63% sequentially as the bank’s provisions fell to $89 million from $272 million in the previous quarter. Additionally, UBS is expected to pay its delayed dividend from 2019 in November of this year and is likely to resume its share repurchase program in FY 2021.

We expect the company to report $33.7 billion in revenues for 2020 – around 15% higher than the previous year’s figure. The bank has seen tremendous growth in its sales & trading revenues for the first three quarters driven by higher trading volumes due to market volatility. While we expect the trading volumes to normalize in the coming months, the segment revenues would still be higher than the year-ago period. Further, the bank has benefited from increased client activity in the debt origination space, which is likely to result in higher investment banking revenues for the year. Overall, we expect the net income figure to rise in FY 2020 due to higher revenues, increasing the EPS figure to $1.61. Thereafter, UBS’s revenues are likely to decline to $31.2 billion in the subsequent year, due to negative growth in the sales & trading segment. This is likely to reduce the EPS figure to $1.48 for FY2021, which coupled with a P/E multiple of around 10x will lead to the valuation of $15.

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[Updated 8/26/2020] UBS Stock Gained 60% Over Recent Months, Is It Still Attractive?

UBS stock (NYSE: UBS) lost nearly 40% – dropping from $13 at the end of 2019 to around $8 in late March – then spiked 60% to around $12.50 now. This implies that the stock has recovered and it is similar to the level it was at the start of the year.

There were two clear reasons for this:  The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This could negatively affect businesses and individuals, impacting their loan repayment capability and exposing UBS to sizable loan losses. The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.

But has the stock run its course or is there room for growth? It seems to have run its course. Trefis estimates UBS’s valuation to be around $13 per share – similar to the current market price – based on upcoming triggers explained below and one major risk factor.

The trigger is an improved trajectory for UBS’s revenues over the second half of the year. We expect the company to report $29.6 billion in revenues for 2020 – higher than the figure for 2019. Our forecast stems from our belief that the economy will gradually improve in Q3. Further, the easing of lockdown restrictions in most of the world is likely to help consumer demand, benefiting the overall business scenario. The bank’s investment banking operations have driven positive revenue growth in Q1 and Q2 due to higher trading volumes, with the bank’s trading revenues surging by 34% in the first half of 2020 as compared to the year-ago period. On similar lines, UBS’s underwriting fees saw significant growth in the first half of 2020 due to a jump in debt underwriting deals after the Fed stimulus. This has partially offset the impact of weak revenues in other segments. While we expect the trading income to drop in the subsequent quarters, it is likely to be still higher than the year-ago period. Overall, we see the company reporting an EPS in the range of $1.14 for FY2020.

Thereafter, UBS’s revenues are expected to remain constant around $29.5 billion in FY2021, as an increase in wealth management revenue is likely to be offset by a decline in sales & trading revenues. Further, the net income margin is likely to grow as compared to the previous year due to a decline in provisions for credit losses, leading to an EPS of $1.24 for FY2021.

Finally, how much should the market pay per dollar of UBS’s earnings? Well, to earn close to $1.24 per year from a bank, you’d have to deposit about $135 in a savings account today, so about 110x the desired earnings. At UBS’s current share price of roughly $12.50, we are talking about a P/E multiple of around 10x, and we think the figure is appropriate.

That said, banking is a risky business right now. Growth looks less promising, and near-term prospects are less than rosy. What’s behind that?

UBS has a portfolio of consumer, commercial, and wealth management loans – more than $315 billion in FY 2019. The economic downturn could deteriorate the loan repayment capability of its consumers, exposing the bank to significant loan defaults. In anticipation of this risk, UBS has increased its provisions for loan losses from around $32 million in the first half of 2019 to $540 million so far – a 17x jump. If the economic condition worsens, this figure could further increase in the subsequent months. Further, a negative economic outlook will make it expensive for the bank to attract funding, increasing the cost of its operations. Moreover, we believe the market has already priced in UBS’s growth and risk drivers, and the company’s stock looks fairly valued at its current levels.

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