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Is UBS AG (UBS) Likely to Disappoint Earnings This Season?

Zacks Equity Research

UBS AG (UBS) is scheduled to report its second-quarter 2014 results on Tuesday, Jul 29.

In the last quarter, this foreign bank delivered impressive earnings with 6.3% year-over-year increase in net income. While prudent expense management, reduced net charges for provisions for litigation, regulatory and similar matters along with own credit gain on financial liabilities was reflected, lower net interest and trading revenues were concerns.

Will UBS AG impress in the upcoming release after combating the challenges the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q2 Results    

After incurring loss in 2012, UBS AG swung to profit in 2013. The company continued to exhibit efforts in strengthening its fundamentals as it reported impressive first-quarter 2014 earnings. The trend is expected to continue with limiting expenses and focus on non-interest income, though margin compression and sluggish loan growth might act as major dampeners.

A prolonged low interest rate environment is not expected to reverse any time soon as central banks of most countries will continue to prioritize growth over inflation control. This strategy is sustainable as inflation is the concern of only a few emerging economies. Thus, banks operating in a low interest rate environment will not be able boost revenue through interest income.

Further, the Federal Reserve’s stricter capital rules for foreign banking organizations (FBOs) sizably operating in the U.S. could cripple their balance sheet. We believe the latest enforcement by The Swiss Financial Market Supervisory Authority (:FINMA) will put some pressure on the top line of UBS AG in the short run, but it will make it sustainable in the long run.

Anyway, amid several litigation issues and internal inefficiencies, this foreign bank is striving hard through restructuring initiatives that focus on building capital levels to achieve operational efficiency and reduce risk-weighted assets (RWAs).

Activities of UBS AG during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 29 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that UBS AG is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The Earnings ESP for UBS AG is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 29 cents.

Zacks Rank: UBS AG’s Zacks Rank #3 (Hold), however, increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Banco Bradesco S.A. (BBD) has an earnings ESP of +2.63% and carries a Zacks Rank #3 (Hold). It is scheduled to report its second-quarter results on Jul 31.

The earnings ESP for Banco Santander-Chile (BSAC) is +12.96% and it carries a Zacks Rank #3 (Hold). The company is scheduled to release its second-quarter results on Jul 31.

Royal Bank of Canada (RY) has an earnings ESP of +3.62% and carries a Zacks Rank #2 (Buy). It is scheduled to report its third-quarter fiscal 2014 (ended Jul 31) results on Aug 22.

Read the Full Research Report on UBS
Read the Full Research Report on RY
Read the Full Research Report on BBD
Read the Full Research Report on BSAC

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