UBS Group's (UBS) Q2 Earnings Rise Y/Y On Lower Expenses

UBS Group AG (NYSE:UBS) reported second-quarter 2019 net profit attributable to shareholders of $1.39 billion, up nearly 1% from the prior-year quarter.

Notably, the company’s performance reflects lower expenses. Also, results were supported by rise in net fee and commission income (up 1% year over year), partially offset by lower net interest income (down 15%).

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

Operating Income Declines, Expenses Drop

UBS Group’s adjusted operating income decreased 2% to $7.52 billion from the prior-year quarter.

Adjusted operating expenses edged down 2% to $5.74 billion in the second quarter. Expenses included provisions for litigation, regulatory and similar matters of $4 million.

Business Division Performance

Global wealth management division’s adjusted operating profit before tax came in at $886 million, down 12% year over year. Lower recurring net fee income due to margin compression and decline in net interest income affected results. Net new money outflows were $2 billion.

Asset Management unit’s adjusted operating profit rose 10% year over year to $135 million, supported by higher performance fees and rise in net management fees.

Personal & Corporate banking division’s adjusted operating profit before tax was up 11% year over year to $391 million. Higher transaction-based income, loan growth and lower expenses resulted in the upswing. Notably, annualized net new business volume growth for personal banking was strong at 4.4%.

The company’s Investment Bank unit’s adjusted operating profit before tax came in at $440 million, down 23% from the prior-year quarter. Challenging market conditions affected both Equities and FX, Rates & Credit revenues. Rise in expenses was another headwind.

Corporate Center incurred adjusted operating loss before tax of $65 million in the quarter.

Strong Capital Position

As of Jun 30, 2019, UBS Group's invested assets were $3.38 trillion, up 2% sequentially. Total assets increased 1% to $968.7 billion in the quarter.

UBS Group’s phase-in common equity tier (CET) 1 ratio was 13.3% as of Jun 30, 2019, compared with 13.4% on Jun 30, 2018. Phase-in CET 1 capital increased 2.4% year over year to $34.9 billion. Fully applied risk-weighted assets climbed 3% to $262.1 billion.

Outlook

As overall pace of growth has decreased due to the global slowdown, management expects political uncertainties and geopolitical tensions to affect the bank. Also, it noted that central banks across the world are indicating a reversal of monetary policy normalization and embarking on new stimulus measures.

A sharp drop in interest rates and expected rate cuts are likely to adversely impact net interest income. UBS Group’s regional and business diversification, along with higher invested assets benefiting recurring revenues, is expected to help offset this.

The company feels that an improvement in investor sentiment and higher market volatility could help to offset the typical third-quarter seasonality.

Our Take

Results highlight a decent quarter for UBS Group, with its Asset Management and Personal & Corporate banking units displaying growth. The company managed to sustain profitability amid several headwinds encountered in the quarter. Nonetheless, pressure from the negative interest rate environment and global concerns posed key headwinds.

UBS Group AG Price, Consensus and EPS Surprise

Currently, UBS Group carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other foreign banks, Itau Unibanco Holding S.A. (NYSE:ITUB) will report results on Jul 29 and Deutsche Bank (DE:DBKGn) Aktiengesellschaft (NYSE:DB) on Jul 24. Mitsubishi UFJ Financial Group, Inc. (NYSE:MUFG) will report on Aug 1.

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