Will UBS Group AG (UBS) Stock Rally Post Q4 Earnings?

UBS Group AGUBS is scheduled to report fourth-quarter 2016 results on Jan 27.

The Swiss banking giant's third-quarter 2016 net profit attributable to shareholders had slumped 60% year over year. The decline primarily reflected a net tax benefit recorded in the prior-year quarter, while the company incurred a net tax expense in the third quarter. Reduced profitability in its Investment Bank and Wealth Management units were also on downside. However, the quarter saw improved profitability in the Wealth Management Americas, Personal & Corporate banking and Asset Management wings.

Notably, over the past one year, UBS gained just 2.8% on the NYSE, significantly underperforming the Zacks classified Foreign Banks industry's growth of 27.1%, reflecting investors' concern amid a challenging operating environment, with low, sometimes even negative rate scenario and global economic slowdown. Management had warned that the persistent market volatility and underlying macroeconomic uncertainties will result in continued client risk aversion and low transaction volumes.

Will the upcoming earnings release put further pressure on UBS stock? It depends largely on whether the company is able to report improved profitability this earnings season. Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q4 Results

Quarterly results may be affected by the continued Franc appreciation that resulted from the Swiss National Bank's (SNB) moves last January, including removal of the EUR/CHF floor. As the Swiss economy largely depends on exports, the persistent strength of the Franc, with respect to other currencies is likely to impact some of the counterparties within the domestic lending portfolio of UBS. This, in turn, may push UBS to record a higher level of credit loss expenses.

UBS' profitability is likely to be hit by the lingering negative interest rate environment which was adopted by the SNB in late 2014. Later in Jan 2015, SNB lowered the rate on bank deposits held at the SNB to -0.75%. While central banks of most of the countries aim to boost growth and inflation through negative interest rates policy, this keeps banks' net interest income under pressure.

However, the Wealth Management division should benefit to some extent, given the company's consistent focus on strategic initiatives to grow loans and increase mandate penetration, along with pricing measures.

UBS, which had gradually shifted focus to its wealth management business, post crisis, to reduce dependence on its more capital intensive investment banking business, remains confident of achieving its target for net new money growth.

During the fourth quarter, trading environment was decent as global financial markets experienced volatility due to several factors. The bank's trading revenues are likely to improve primarily, driven by higher fixed-income trading. Trading in equities is likely to typically remain subdued due to lesser client activities.

Further, revenues from advisory and underwriting are likely to witness significant improvement, as increase in M&A activities and debt underwriting is foreseen.

As UBS has been embroiled in several lawsuits and investigations, the company might have kept additional reserves for litigation expenses, which could dampen the bottom line to some extent. However, expense base may get some ease owing to UBS' continued cost-control efforts. Notably, fourth-quarter expense would include the UK bank levy. In addition, general and administrative expenses are anticipated to increase due to seasonality.

Amid several litigation issues and internal inefficiencies, this foreign bank has been striving hard through its restructuring initiatives that focus on building capital levels to achieve operational efficiency and reduce risk-weighted assets (RWAs).

UBS AG Price

UBS AG Price | UBS AG Quote

Currently, UBS sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Among other foreign banks, Deutsche Bank AG DB , Itau Unibanco Holding S.A. ITUB and The Royal Bank of Scotland Group plc RBS are scheduled to report results on Feb 2, Feb 7 and Feb 24, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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