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UBS (UBS) Up 2.5% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for UBS (UBS). Shares have added about 2.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is UBS due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

UBS Group's Q4 Earnings Rise Y/Y on Lower Expenses

UBS Group AG reported fourth-quarter 2019 net profit attributable to shareholders of $722 million compared with $315 million in the prior-year quarter.

The company’s performance was supported by higher net interest income (up 3% year over year) along with rise in net fee and commission income (up 3%). Further, decline in expenses was a tailwind.

In full-year 2019, the company reported net profit attributable to shareholders of $4.3 billion, down 4.7% year over year.

The company recorded higher profitability in Asset Management, Global wealth management, Personal & Corporate banking and Investment Bank units on an adjusted basis. However, performance of Corporate Center unit was disappointing.

Operating Income Climbs, Expenses Fall

UBS Group’s adjusted operating income increased 4.4% to $7.08 billion from the prior-year quarter.

Adjusted operating expenses fell 6.9% to $5.87 billion in the fourth quarter. Expenses included provisions for litigation, regulatory and similar matters of $104 million.

Business Division Performance

Global wealth management’s adjusted operating profit before tax came in at $787 million, up significantly year over year. Higher transaction-based income along with lower expenses supported results. Net new money outflows were $4.7 billion.

Asset Management’s adjusted operating profit surged 48% year over year to $187 million, supported by rise in net management and performance fees. Also, invested assets rose to $903 billion.

Personal & Corporate banking’s adjusted operating profit before tax was up 2% year over year to $309 million. Higher transaction-based income and recurring net fee income were partially offset by lower interest income. Annualized net new business volume growth for personal banking was 2.8%.

Investment Bank unit’s adjusted operating profit before tax came in at $198 million against loss of $5 million in the prior-year quarter. Rise in Equities and FX, Rates & Credit revenues aided bottom-line growth. Decline in expenses was another tailwind.

Corporate Center incurred adjusted operating loss before tax of $273 million in the quarter.

Strong Capital Position

As of Dec 31, 2019, UBS Group's invested assets were $3.61 trillion, up 5.4% sequentially. Total assets decreased marginally to $972.2 billion.

UBS Group’s phase-in common equity tier (CET) 1 ratio was 13.7% as of Dec 31, 2019, compared with 12.9% on Dec 31, 2018. Phase-in CET 1 capital increased 2.6% year over year to $35.6 billion. Fully applied risk-weighted assets fell 1.7% to $259.2 billion.

Outlook

The company expects easing of monetary policy by the central banks to contribute to a strong performance in financial markets. Also, it expects a favorable credit environment and a partial resolution of trade disputes to mitigate slowing global economic growth.

While the macroeconomic and geopolitical situation remains uncertain, the company expects first-quarter 2020 to witness more seasonality, thereby supporting earnings. As clients are more active at present, UBS Group expects to earn higher transaction-related revenues. Higher asset prices are likely to have a positive effect on recurring fee income in its asset gathering businesses.

Restructuring expenses of around $200 million are expected in first-half 2020. Also, in the first quarter of 2020, management anticipates a $3 billion regulatory-related increase in credit risk RWA, mainly from the implementation of a standardized approach for counterparty credit risk, which became effective Jan 1, 2020.

In the first half of 2020, the company expects to buy back around $450 million worth of shares, completing the CHF2 billion program. Notably, in the latter half, the company will assess further buybacks depending on business outlook and any peculiar developments.

Financial Targets (2020-2022)

In the three-year period, the company aims to drive higher, superior returns by growing each of its businesses, leveraging its unique, integrated and complementary business portfolio and geographic footprint.

For the Group, UBS targets return on CET1 capital of 12-15% and cost to income ratio of 75-78%.

Also, CET1 leverage ratio is anticipated to be 3.7%.

Loans are expected to grow by around $20 billion a year from 2020 to 2022.
The company expects to deliver 10-15% growth in profit before tax for its Global Wealth Management division.

Over the next three years, management expects the IB unit to consume up to a third of the group’s risk-weighted assets and LRD.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.


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