A month has gone by since the last earnings report for UBS (UBS). Shares have lost about 1.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is UBS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
UBS Group Q1 Earnings Rise Y/Y on Higher Revenues
UBS Group AG reported first-quarter 2020 net profit attributable to shareholders of $1.6 billion compared with $1.14 billion in the prior-year quarter.
The company’s performance was supported by higher net interest income (up 18% year over year) along with rise in net fee and commission income (up 22%). However, higher expenses were dragging.
The company recorded higher profitability in Asset Management, Global wealth management and Investment Bank units. However, the performance of Personal & Corporate banking along with Group Functions unit was disappointing.
Operating Income Climbs, Expenses Rise
UBS Group’s operating income increased 10% to $7.93 billion from the prior-year quarter.
Operating expenses rose 4% to $5.93 billion in the first quarter. Expenses included provisions for litigation, regulatory and similar matters of $6 million.
Business Division Performance
Global wealth management’s operating profit before tax was $1.22 billion, up 41% year over year. Higher transaction-based income along with rise in net interest income supported results. Net new money inflows were $12 billion.
Asset Management’s operating profit surged 52% year over year to $157 million, supported by rise in net management and performance fees. Also, invested assets climbed 1% to $832 billion.
Personal & Corporate banking reported operating profit before tax of $322 million, down 16% year over year. Lower transaction-based income was partially offset by higher interest income and recurring net fee income. Annualized net new business volume growth for personal banking was strong at 7.7%.
Investment Bank unit’s operating profit before tax was $709 million compared with $207 million in the prior-year quarter. Higher volumes and volatility, particularly in Foreign Exchange, Rates and Cash Equities revenues, aided bottom-line growth. Rise in expenses was a headwind.
Group Functions incurred operating loss before tax of $410 million in the quarter.
Strong Capital Position
As of Mar 31, 2020, UBS Group's invested assets were $3.24 trillion, down 10.3% sequentially. Total assets increased 13% to $972.2 billion.
The company’s phase-in common equity tier (CET) 1 ratio was 12.8% as of Mar 31, 2020, compared with 13% on Mar 31, 2020. Phase-in CET 1 capital increased 5.9% year over year to $36.7 billion. Fully applied risk-weighted assets increased 7% to $286.3 billion from the year-ago quarter.
The company expects global GDP to contract as a result of the COVID-19 pandemic. Also, impacts on businesses and rising unemployment are expected to lead to elevated levels of credit loss expenses for the industry.
While the macroeconomic situation remains uncertain, the company expects lower asset prices to reduce its recurring fee income. Also, lower interest rates are anticipated to hamper net interest income growth, while client activity levels will likely decrease, affecting transaction-based income. UBS Group expects the continued disciplined execution of plans to help mitigate the negatives.
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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