UBS Group AG (UBS) is scheduled to report its fourth-quarter 2014 results on Tuesday, Feb 10.
In the last quarter, this foreign bank delivered impressive earnings with 32% year-over-year increase in net income. While elevated net interest income and increased net fee and commission income were the positives, rise in expenses and high net charges for provisions for litigation, regulatory and similar matters were the concerns.
Will UBS impress in upcoming release after combating the challenges the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.
Factors to Influence Q4 Results
Legal hassles continue to trouble Swiss banking giant UBS. Recently, the bank came under investigation in the U.S. over doubts of helping Americans evade taxes through investments banned in the U.S. Notably, the Swiss bank paid $780 million in 2009 to regulators as settlement related to U.S. criminal and civil investigation and acknowledged that it had helped clients evade taxes.
Further, after losing an initial appeal against $1.4 billion (€1.1 billion) bail payment in a French tax-evasion probe in September, the bank’s appeal was rejected this time by France’s apex appeals court, Cour de Cassation. Notably, UBS has been under investigations by the French authorities on potential charges of illegally soliciting clients in France to open Swiss accounts for hiding undisclosed wealth in the period between 2004 and 2012. Such lawsuits might hurt the financials of the company.
After incurring loss in 2012, UBS swung to profit in 2013. The company continued to exhibit efforts in strengthening its fundamentals as it reported impressive results in the first three quarters of 2014. The trend is expected to continue with limiting expenses and focus on non-interest income, though margin compression and sluggish loan growth might act as major dampeners.
A prolonged low interest rate environment is not expected to reverse any time soon as central banks of most of the countries will continue to prioritize growth over inflation control. This strategy is sustainable as inflation is the concern of only a few emerging economies. Thus, banks operating in a low interest rate environment will not be able boost revenue through interest income.
Capital efficiency is the key to survival, and most foreign banks are adopting reconstruction-by-asset-sale strategies to strengthen capital ratios. While this will make their business safer, growth prospects are unimpressive with lessening sources of income.
Further, the full implementation of the Basel III standards — the risk-proof capital standard agreed upon by regulators across the world — is due in 2018. Though some non-U.S. banks have already started complying with the requirements, many have yet to make headway.
Anyway, amid several litigation issues and internal inefficiencies, this foreign bank is striving hard through restructuring initiatives that focus on building capital levels to achieve operational efficiency and reduce risk-weighted assets (RWAs). Currently, UBS carries a Zacks Rank #3 (Hold).
Operating Expenses Guidance
To achieve CHF 2.1 billion net cost reduction target, UBS has updated guidance of restructuring costs for 2014 and 2015, and initiated that for 2016 and 2017. The company projects restructuring costs of about CHF 700 million for 2014 and CHF 1.4 billion for 2015.
For 2016, restructuring costs are estimated at CHF 900 million and for 2017 it is pegged at CHF 400 million. Additionally, UBS expects to incur about CHF 100 million per year from 2015 to 2017 in order to meet planned cost reductions.
Moreover, charges related to litigation, regulatory and similar matters are expected to remain at elevated levels through 2014.
Other foreign banks that are expected to release results in the coming days include The Royal Bank of Scotland Group plc (RBS), Credit Suisse Group AG (CS) and HSBC Holdings plc (HSBC). Credit Suisse will report December quarter-end results on Feb 12, while HSBC is scheduled to report on Feb 23 and Royal Bank of Scotland on Feb 26.
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