Morningstar | UBS 3Q 2018 Results: Strong Beat but Guidance Lacks Ambition
Narrow-moat UBS reported year-on-year pretax profit growth of 37% to CHF 1.7 billion for third-quarter 2018, meaningfully ahead of consensus, which was looking for CHF 1.3 billion for the quarter. We do not forecast on a quarterly basis, but with three quarters of 2018 reported, UBS has achieved 80% of our 2018 profit before tax estimate of CHF 6.5 billion. Bar a severe slump, we are confident that UBS will achieve our 2018 estimate, and we maintain our narrow moat rating and our fair value estimate of CHF 20Â per share.UBS also updated its guidance, now split into targets and "ambitions" for the first time. We are already sceptical about performance targets from banks, as in our experience, there is limited accountability should the bank not achieve these targets. An ambition seems even less concrete, and it seems a rather pointless exercise. Be that as it may, UBS now targets a return of 15% on its core equity Tier 1, and it has an ambition of achieving a 17% return on core equity Tier 1. We estimate that UBS will generate a 16% return on core equity Tier 1 in 2018. The presence of deferred tax assets (excluded from core equity Tier 1) explains the difference between UBS' core equity Tier 1 return and its return on tangible equity.
UBS' earnings beat was largely the result of a better-than-expected performance from its investment banking business (26% of revenue), which benefited from increased volatility and uncertainty. The wealth management business (55% of revenue) saw good net new money inflows of CHF 13.5 billion. Important for our investment case is that CHF 8.5 billion of the inflows were from UBS'Â ultra-high-net-worth clients (more than USD 1 billion of investable assets). Ultra-high-net-worth clients are a highly profitable client segment with complex needs that we believe are less likely to switch than other wealth management clients, and these clients' invested assets now make up 27% of invested assets for UBS' wealth management business.
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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