Will UBS Group (UBS) Decline Further Post Q3 Earnings?

UBS GROUP AG Price | UBS GROUP AG Quote

Will the upcoming earnings release put further pressure on UBS stock? It depends largely on whether the company is able to report improved profitability this earnings season. Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q3 Results

Quarterly results may be affected by the continued Franc appreciation that resulted from the Swiss National Bank’s (SNB) 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 affect 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.

UBS’ profitability is likely to be hit by the continued negative interest rate environment which was adopted by the 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 keeps banks’ net interest income under pressure.

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.

UBS, which had gradually shifted focus to its wealth management business post crisis, to reduce dependence on its more capital intensive investment banking business, remains confident of achieving its target for net new money growth.

During the third quarter, trading environment was decent as global financial markets experienced volatility due to several factors, including the Brexit vote. The bank’s trading revenues are likely to improve primarily, driven by higher fixed-income trading. Trading in equities is likely to typically remain subdued due to lesser client activities.

However, revenues from advisory and underwriting are not likely to witness significant improvement, as M&A activities and IPOs continued to decline during the quarter in the wake of global economic concerns.

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.

Amid several litigation issues and internal inefficiencies, this foreign bank has been striving hard through its restructuring initiatives that focus on building capital levels to achieve operational efficiency and reduce risk-weighted assets (RWAs). Notably, though the revised credit conversion factors will lead to an increase in credit risk RWA of around CHF 3 billion in the third quarter, the company may record overall reduction in RWAs.

Currently, UBS currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.