Morningstar | UBS' 2018 Results: Weak Final Quarter in Investment Banking Leads to Earnings Miss
Narrow-moat UBS reported fiscal-year 2018 profits before tax of $6.4 billion. This missed our estimate of $6.5 billion by 2%. Our estimate was in line with consensus expectations. Looking at the fourth quarter in isolation, the miss was obviously more pronounced--around 10% lower than our expectation. In early trade, UBS has been sold off aggressively. We do, however, highlight that most of the earnings miss is attributable to a very weak quarter for UBS' trading activities within its investment banking business. Trading revenue are notoriously volatile, and one should guard against extrapolating one quarter's revenue into the future. The net money outflows from UBS' wealth management business is more concerning, but this is still a cyclical issue and not a reflection of any deficiency in the quality of UBS' franchise. We remain confident in UBS' ability to generate midcycle profits ahead of its cost of capital, and it's one of the few European banks in our coverage universe about which we can say this.While UBS has decreased its investment banking exposure over the last few years, it still contributes 27% of group revenue. UBS recorded a pretax loss of $47 million for the final quarter of 2018 in its investment banking business, compared with $483 million pretax profits in the third quarter of 2018. We do not forecast divisional profits, but consensus was looking for $500 million.
Central to our investment case for UBS is its market-leading franchise in the ultra-high net worth individual space, which we view as particularly attractive given its higher profitability and barriers to entry. The net money outflows of $4 billion during the last quarter of 2018 is disappointing, but UBS still recorded net new money inflows of $13 billion for fiscal 2018. Maybe more importantly, it is worthwhile for investors to see the $4 billion outflow in the context that UBS' total assets under management in its wealth management arm stand at $2.3 trillion.
UBS Group is a holding company. Through its subsidiary, UBS, Co. provides financial services including advisory services, underwriting, financing, market making, asset management and brokerage and retail banking. Co.'s operations are organized along five segments: Wealth Management (financial services to high net worth and ultra high net worth individuals as well as private and corporate clients); Wealth Management Americas (advice-based solutions for ultra high net worth, high net worth and core affluent individuals and families); Personal & Corporate Banking (provides financial products and services to private, corporate and institutional clients); Asset Management and Investment Bank.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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