UBS Group (UBS) to Report Q2 Earnings: What's in Store?
UBS Group AG UBS is scheduled to report second-quarter 2016 results on Friday, Jul 29.
European banks have been facing revenue pressure as volatility in commodity prices, slowdown of emerging markets and global growth concerns continue affecting business and client activity levels as well as market volumes. Further the negative interest rate environment added to the woes. Amid such a tough backdrop, UBS’ net profit attributable to shareholders declined over 64% year over year in the first-quarter 2016.
Management had acknowledged that negative market performance, significant volatility, along with an underlying macroeconomic and geopolitical uncertainty, resulted in much of the client risk aversion and substantially low transaction volumes in the first quarter. While some of these issues have recently stabilized, several macroeconomic headwinds still persist, and are likely to continue in the near term.
Will UBS disappoint in the upcoming release given the challenges faced by the industry during the second quarter? Let's see what factors might have influenced the earnings report this time around.
Factors to Influence Q2 Results
Profitability of UBS is likely to be hit by the continued negative interest rate environment which was adopted by the by the Swiss National Bank (SNB) in late 2014. Later in Jan 2015, SNB lowered the rate on bank deposits held at the SNB to -0.75%. While central banks of most of the countries aim to boost growth and inflation through negative interest rates policy, this takes a toll on the banks’ net interest income.
Quarterly results may also be affected by the continued Franc appreciation that resulted from the SNB’s moves last January including removal of the EUR/CHF floor. As the Swiss economy largely depends on exports, the persistent strength of the Franc with respect to other currencies is likely to impact some of the counterparties within the domestic lending portfolio of UBS. This in turn may push UBS to record a higher level of credit loss expenses.
However, the Wealth Management division should benefit to some extent, given the company’s continued focus on strategic initiatives to grow loans and increase mandate penetration, along with pricing measures.
In Wealth Management Americas, UBS expects to witness the typical trend of increased client withdrawals tied with seasonal income tax payments. In the previous three years, second quarter outflows from tax payments have been in the range of CHF 2–4 billion.
UBS, which had gradually shifted focus to its wealth management business post crisis, to reduce reliance on its more capital intensive investment banking business, remains confident of achieving its target for net new money growth. Notably, during the first-quarter 2016 net new money from its combined wealth management businesses was CHF 29.1 billion, highest since the first quarter of 2008.
During the second quarter, global mergers and acquisitions declined substantially as a number of deals were abandoned amid concerns including regulatory and tax risks. Following the broader trend of lower investment banking revenues, UBS is likely to witness a decline as well.
As UBS has been embroiled in several lawsuits and investigations, the company might have kept additional reserves for litigation expenses, which could dampen the bottom line to some extent. However, expense base may get some ease owing to UBS’ continued cost control efforts. Notably, the company is anticipated to reflect savings of CHF 1.4 billion in the second quarter results.
Amid several litigation issues and internal inefficiencies, this foreign bank is striving hard through its restructuring initiatives that focus on building capital levels to achieve operational efficiency and reduce risk-weighted assets (RWAs). Notably, the quarter is likely to exhibit further reduction in RWAs.
Currently, UBS currently carries a Zacks Rank #5 (Strong Sell).
Other foreign banks that are expected to release results in the coming days include, Barclays PLC BCS, HSBC Holdings plc HSBC and Mitsubishi UFJ Financial Group, Inc. MTU. Barclays is scheduled to report second-quarter results on Jul 29, while HSBC Holdings will report on Aug 3. Mitsubishi UFJ will report fiscal first quarter 2017 results (ended Jun 2016) on Aug 16.
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