On Sep 15, 2014, we issued an updated research report on UBS AG (UBS). Though this foreign bank recently reported impressive second-quarter 2014 results, aided by prudent expense management, we remain cautious due to the current economic uncertainty across the industry, stringent regulatory landscape and litigation issues. Moreover, given the stressed operating environment, we believe any significant improvement in earnings would remain elusive in the upcoming quarters.
Notably, net charges for provisions for litigation, regulatory and similar matters increased sequentially during second-quarter 2014 and remain elevated. In view of the current regulatory and political climate affecting financial institutions, and the company’s exposure to a number of claims and regulatory matters, these charges are expected to remain at elevated levels through 2014. Such a trend poses a risk to profitability.
In the wake of the 2007–2009 financial crisis and the following instability in global financial markets, regulators and legislators have proposed, adopted and are actively considering a wide range of changes to these laws and regulations to limit the systemic risks posed by major financial institutions. They are expected to increase costs and could also generate capital inefficiencies and impact profitability.
Management believes there are certain issues that may create pressure on the company’s financials in the near term. These include absence of persistent progress on material improvements regarding unresolved issues in Europe, U.S. fiscal and monetary issues and the ongoing global concerns.
Ongoing concerns have triggered a downward revision in the Zacks Consensus Estimates, as analysts become more bearish on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that decreased 2.9% to $1.35 for 2014 and declined 4.6% to $1.67 per share for 2015, over the past 30 days. Hence, UBS AG currently carries a Zacks Rank #5 (Strong Sell).
Key Picks from the Sector
Some better ranked foreign stocks worth considering include HSBC Holdings plc (HSBC), Itau Unibanco Holding S.A. (ITUB) and ICICI Bank Ltd. (IBN). All three carry a Zacks Rank #2 (Buy).
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