Sep 24, 2020
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UBS Stock Gained 60% Over Recent Months, Is It Still Attractive?

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NIHOMBASHI CHUO CITY TOKYO JAPAN – 2019/09/26: UBS advertisement billboard seen in Nihombashi. . [+] SOPA IMAGES/LIGHTROCKET VIA GETTY IMAGES UBS stock (NYSE: UBS) lost nearly 40% – dropping from $13 at the end of 2019 to around $8 in late March – then spiked 60% to around $12. 50 now. This means that the stock has recovered and that’s akin to the level it was in the beginning of the year


There were two clear reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This could negatively affect businesses and individuals impacting their loan repayment capability and exposing UBS to sizable loan losses. The multi-billion-dollar Fed stimulus provided a floor and the stock recovery owes much to that


But has the stock run its course or is there room for growth? It seems to have run its course. Trefis estimates UBS s valuation to be around $13 per share – akin to the present market price – in response to upcoming triggers explained below and one major risk factor. The trigger is a stronger trajectory for UBS s revenues over the second one half of the year


We predict the company to report $29. 6 billion in revenues for 2020 – higher than the figure for 2019. Our forecast stems from our belief that the economy will gradually improve in Q3. Further the easing of lockdown restrictions in many of the world is likely to help consumer demand benefiting the final business scenario


The bank s investment banking operations have driven positive revenue growth in Q1 and Q2 as a result of higher trading volumes with the bank s trading revenues surging by 34% inside the first half of 2020 as compared to the year-ago period. On similar lines UBS s underwriting fees saw significant growth inside the first half of 2020 as a result of a jump in debt underwriting deals after the Fed stimulus


This has partially offset the impact of weak revenues in other segments. While we predict the trading income to drop inside the subsequent quarters that’s prone to be still higher than the year-ago period. Overall we see the company reporting an EPS inside the range of $1. 14 for FY2020. Thereafter UBS s revenues are expected to remain constant around $29


5 billion in FY2021 as a rise in wealth management revenue is likely to be offset by a decline in sales & trading revenues. Further the internet income margin is prone to grow as compared to the former year as a result of a decline in provisions for credit losses leading to an EPS of $1


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Going All In On Young Voter Education Finally how much should the market pay per dollar of UBS s earnings? Well to earn close to $1


24 per year from a bank you d have got to deposit about $135 in a savings account today so about 110x the desired earnings. At UBS s current share price of approximately $12. 50 we are talking a couple of P/E multiple of around 10x and we predict the figure is appropriate


That said banking is a risky business right now. Growth looks less promising and near-term prospects are under rosy. What s behind that? UBS has a portfolio of consumer commercial and wealth management loans – more than $315 billion in FY 2019. The commercial downturn could deteriorate the loan repayment capability of its consumers exposing the bank to significant loan defaults


In anticipation of this risk UBS has increased its provisions for loan losses from around $32 million inside the first half of 2019 to $540 million to this point – a 17x jump. If the commercial condition worsens this figure could further increase inside the subsequent months. Further a negative economic outlook will make it expensive for the bank to attract funding increasing the cost of its operations


Moreover we believe the market has already priced in UBS s growth and risk drivers and the company s stock looks fairly worth its current levels. What if you re searching for a more balanced portfolio instead? Here s a top quality portfolio to outperform the market with over 100% return since 2016 versus 55% for the S&P 500


Comprised of companies with strong revenue growth healthy profits various cash and low risk. It has outperformed the wider market year after year consistently. See all Trefis Price Estimates and Download Trefis Data here What s behind Trefis? See How It s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product R&D and Marketing Teams

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