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UBS Group (UBS) Q1 Earnings Deteriorate Y/Y; Costs Fall

UBS Group AG UBS reported first-quarter 2016 net profit attributable to shareholders of CHF 707 million ($711.7 million), down 64.2% year over year. The results were impacted by a 53% year-over-year decrease in net trading income and 7% drop in net fee and commission income, partially offset by a 5% increase in net interest income.

The reported quarter included net charges for provisions for litigation, regulatory and similar matters of CHF 39 million ($39.3 million).

Performance in Detail

UBS Group’s adjusted operating income decreased 13.6% from the prior-year quarter to CHF 7.0 billion ($7.04 billion). Adjusted operating expenses contracted 3.4% year over year to CHF 5.6 billion ($5.64 billion).

Notably, as of Mar 2016, UBS Group AG achieved cost savings of CHF 1.2 billion as compared with 2013. Moreover, the bank is on track to achieve CHF 2.1 billion in net cost reductions by the end of 2017.

UBS Group AG’s pre-tax operating profit on an adjusted basis came in at CHF 1.4 billion ($1.41 billion) in the quarter, down 39.1% year over year.

The company’s Investment Bank unit recorded adjusted operating profit before tax of CHF 370 million ($372.4 million), down 55.7% year over year. Wealth Management Americas division’s adjusted operating profit before tax decreased 11.9% from the prior-year quarter to CHF 244 million ($245.6 million).

Further , the Wealth Management division’s adjusted operating profit before tax declined nearly 25.7% year over year to CHF 636 million ($640.2 million) in the quarter. Personal & Corporate banking division’s adjusted operating profit before tax was down 4.7% year over year to  CHF 422 million ($424.8 million). The Asset Management unit’s adjusted operating profit declined 40.9% year over year to CHF110 million ($110.7 million) in the quarter.

Corporate Center reported adjusted operating loss before tax of CHF 417 million ($419.7 million) compared with a loss of CHF 152 million in the prior-year quarter.

Capital Position

As of Mar 31, 2016, UBS AG's invested assets were CHF 2.6 trillion ($2.7 trillion), down 3.7% year over year. Total assets stood at CHF 966.9 billion ($1 trillion), declining 7.8% year over year.

UBS Group’s phase-in BIS Basel III common equity tier (CET) 1 ratio stood at 16.9% as of Mar 31, 2016, compared with 18.6% in the prior-year quarter. Further, phase-in BIS Basel III CET 1 capital decreased 10.3% year over year to CHF 36.6 billion ($37.9 billion) as of Mar 31, 2016. Fully applied RWA declined 1.3% year over year to CHF 213.6 billion ($221.3 billion).

Outlook

UBS Group believes that several macroeconomic headwinds and geopolitical issues are likely to remain unresolved in the near term.  Further, owing to the recently proposed changes to the too big to fail regulatory framework in Switzerland, the company is likely to incur significant interest costs.

The company also highlighted several concerns including headwinds from interest rates, which have not risen in line with market expectations and the weak performance of the euro against the Swiss franc in the year. However, amid a challenging operating environment, the company is committed toward the execution of its strategies and expects to generate sustainable returns for shareholders.

In Conclusion

While results do not reflect a strong quarter for UBS Group as several of its units failed to exhibit growth, we are optimistic as the company managed to sustain profitability in spite of a number of headwinds prevailing in the quarter. UBS Group is also focused on building its capital levels. Restructuring initiatives including cost control are encouraging. However, the stressed operating environment is a potent concern.

UBS Group currently carries a Zacks Rank #3 (Hold).

Performance of Other Foreign Banks

The Royal Bank of Scotland Group plc RBS reported first-quarter 2016 loss attributable to shareholders of £968 million ($1.4 billion) as compared with a loss of £459 million in the prior-year quarter. Results included payment of the final Dividend Access Share (DAS) dividend of £1,193 million to the U.K. Government.  

Deutsche Bank AG DB reported net income of €236 million ($260.3 million) in the first quarter of 2016, down 57.8% year over year. Income before income taxes came in at €579 million ($638.6 million), down 60.9% year over year. The quarterly results were impacted by lower revenues and higher provisions. However, the reduction in non-interest expenses was a positive.

Among others, Mitsubishi UFJ Financial Group, Inc. MTU is slated to report March-end results on May 16.

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