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Cost-Control Efforts Aid UBS Group (UBS): Should You Buy?

Zacks Equity Research
·4-min read

UBS Group AG’s UBS efforts to free up resources through restructuring initiatives and investing in profitable areas might help enhance prospects. Also, focus on building capital levels and undertaking cost-saving initiatives seems impressive. However, negative interest rates and strict regulations in the domestic economy continue to weigh on the company.

The Zacks Consensus Estimate for current-year earnings of $1.07 has been revised 3.9% upward over the past 30 days. The stock currently carries a Zacks Rank #2 (Buy).

Shares of UBS Group have lost 2.8% over the past year compared with the 31.9% decline of the industry.

 

 

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UBS Group has strengthened cost management and transparency by focusing on improving cost efficiency, which is positive for its long-term success. Through the efforts, the company achieved net cost reductions of $2.7 billion over the last five years. We believe gradual cost reduction will aid bottom-line growth.

Further, the company has a strong balance sheet position. As of Mar 31, 2020, it held debt worth $141.6 billion, and cash and cash equivalents worth $139 billion. Notably, the debt level has declined in the past few quarters. Moreover, the company’s liquidity coverage ratio has remained broadly stable at 1.3 in comparison to the past period. Since the ratio indicates its ability to meet its debt obligations based on current income, we believe UBS Group carries low credit risk and a lesser likelihood of default of interest and debt repayments if the economic situation worsens.

With support from a strong balance sheet position, it continues to undertake inorganic growth strategies with an aim to fortify its footprint in various areas. In June 2019, it entered a joint venture with Japan’s largest trust banking group, Sumitomo Mitsui Trust Holdings, which gave it access to the latter’s affluent client base. Further, in September, it entered an investment banking joint-venture agreement with Banco Do Brasil SA.

The company engages in efficiency programs to free up resources, enabling it to make investments to support growth and service clients better. It expects adjusted cost/income ratio to be above 72% by 2021.

Nevertheless, UBS Group’s net interest income remains under pressure, owing to the negative interest rate environment in the domestic economy. Also, the appreciation of the Swiss franc against other currencies is likely to hurt earnings, as a significant part of the company’s operating income is denominated in non-Swiss franc currencies.

Other Key Picks

Earnings estimates for First Republic Bank FRC have moved 2% north over the past 60 days for the ongoing year. The company’s shares have declined 7.5% over the past six months. It currently has a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TFS Financial Corporation TFSL has witnessed a nearly 1% upward earnings estimate revision for the ongoing year in the past 60 days. This Zacks #1 Ranked stock has lost 24.2% over the past year.

Earnings estimates for GAIN Capital Holdings GCAP have moved significantly north over the past 60 days for the ongoing year. The company’s shares have rallied 49.3% over the past six months. It carries a Zacks Rank of 2 at present.

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