Morningstar | UBS Updated Forecasts and Estimates from 31 Jul 2018
Narrow-moat UBS reported pretax profit growth of 14% to CHF 1.7 billion for the second quarter of 2018, meaningfully ahead of consensus, which was looking for CHF 1.4 billion for the quarter. While we do not forecast on a quarterly basis, earnings growth for the first two quarters came in slightly below our expectations and we consequently cut our estimate for full-year pretax profits for UBS by 5% to CHF 6.5 billion. We maintain our narrow moat rating and our fair value estimate of CHF 20 Â per share .The market liked the results, with the UBS share price rallying by 4% in early-morning trading on July 24. However, we are less concerned with the quarterly beat and more focused on the longer-term indicators of the strength of the franchise. Two issues concern us. First, UBS recorded net new money outflows out of both its wealth management and asset-management businesses, after a combined inflow of CHF 100 billion over the preceding four quarters. We should highlight that UBS continues to see net new money inflows into its ultra-high-net-worth portfolio. Ultra-high-net-worth clients are a highly profitable client segment, and UBS' strong presence in this market is key to our investment case and moat rating for the firm. Second, UBS' wealth management gross margin (revenue/assets under management) has been tracking down slightly over the past two quarters. The 0.04-percentage-point decline to a gross margin of 0.71% is not significant yet, but it is something to keep an eye on
Net new money inflows and the margin generated on assets managed are arguably the two key indicators of longer-term growth for UBS, and it is in this context that we do not believe this was a great quarter for UBS.
Earnings growth for the rest of the year should remain robust, supported by nonrecurring costs in the base and the strong asset inflows of prior quarters. Still, we would like to see a return to net inflows and stable or expanding margins in the second half of the year.
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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