UBS Group's (UBS) Q4 Earnings Impress On Lower Expenses

UBS Group AG (NYSE:UBS) reported fourth-quarter 2018 net profit attributable to shareholders of $696 million against loss of $2.4 billion in the prior-year quarter.

Notably, the company’s performance in the quarter reflects lower expenses. However, results were affected by fall in net fee and commission income (down 2.1% year over year) and lower net interest income (down 13%).

For full-year 2018, the company reported net profit attributable to shareholders of $4.9 billion, up 25% on an adjusted basis.

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

Operating Income Up, Expenses Drop

Excluding the significant items, UBS Group’s adjusted operating income increased 3.5% to $6.8 billion from the prior-year quarter.

Adjusted operating expenses edged down slightly year over year to $5.9 billion in the fourth quarter. Expenses included provisions for litigation, regulatory and similar matters of $151 million.

Business Division Performance

The Global wealth management division’s adjusted operating profit before tax came in at $769 million, down 22% year over year. Lower transaction-based revenues due to fall in client activity were partially offset by higher net interest margins and income along with loan growth. Net new money outflows were $7.9 billion in the fourth quarter.

The Asset Management unit’s adjusted operating profit rose 15% year over year to $134 million in the quarter under review, supported by higher performance fees along with reduced personnel costs.

Personal & Corporate banking division’s adjusted operating profit before tax was down 13% year over year to $375 million. Lower transaction-based income, together with higher credit loss expenses, resulted in the decline. Notably, annualized net new business volume growth for personal banking was 2.2%.

The company’s Investment Bank unit’s adjusted operating profit before tax came in at $26 million, down 84% from the prior-year quarter. Challenging market conditions affected both Equities and Corporate Client Solutions revenues. Notably, decline in expenses was a positive factor.

Corporate Center reported adjusted operating loss before tax of $443 million in the fourth quarter.

Strong Capital Position

As of Dec 31, 2018, UBS Group's invested assets were $3.10 trillion, down 4.9% year over year. Total assets came in at $958.5 billion, climbing around 2%.

UBS Group’s phase-in common equity tier (CET) 1 ratio was 13.1% as of Dec 31, 2018, compared with 13.8% as of Dec 31, 2017. Furthermore, phase-in CET 1 capital increased 2.9% year over year to $34.5 billion) as of Dec 31, 2018. Fully applied risk-weighted assets climbed 8.3% to $263.7 billion).

Outlook

As geopolitical tensions, rising protectionism and trade disputes persist, management expects these factors to affect investor sentiment and confidence and thus, client activity in first-quarter 2019.

Also, lower invested assets as a result of market declines in the fourth quarter are expected to affect recurring revenues in Global Wealth Management and Asset Management.

Our Take

Results highlight a decent quarter for UBS Group, with its Asset Management unit displaying growth. The company managed to sustain profitability amid several headwinds encountered in the quarter. Nonetheless, prevailing pressure from the negative interest rate environment and regulatory expenses are concerns.

UBS Group AG Price, Consensus and EPS Surprise

Currently, UBS Group carries a Zacks Rank #4 (Sell).

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 December quarter-end results on Feb 4 and Credit Suisse (NYSE:CS) on Feb 13. The Royal Bank Scotland PLC (NYSE:RBS) will report results on Feb 22.

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