UBS AG's Long-term Ratings Lifted by a Notch by Moody's

UBS AG – a wholly owned subsidiary of UBS Group AG UBS – has received one notch upgrade in its long-term ratings by the Moody's Investors Service, an arm of Moody's Corporation MCO. Moreover, the outlook for the company is ‘Stable'. Notably, the rating action concluded a review for upgrade, which commenced last year in October.

Among several rating upgrades for UBS AG and affiliates, the long-term deposit rating of UBS AG was raised to Aa3 from A1, its senior unsecured debt rating to A1 from A2 and its standalone baseline credit assessment BCA to baa1 from baa2.

Why the Upgrade

The ratings upgrades reflect enhanced leverage ratio of UBS AG and Moody's expectations of improved profitability and earnings stability on the back of reduced restructuring costs, lower losses from its Non-core and Legacy Portfolio and cost savings generated from its initiatives that commenced several years back.

Over the last several years, UBS' profitability has been dampened by significant litigation charges, restructuring costs, regulatory compliance, and the wind-down of its Non-core and Legacy Portfolio while a low interest rate environment added to the woes. However, UBS is now set to benefit as its restructuring moves, which were initiated in 2011 are mostly completed including reduced dependence on investment banking business.

Moody's expects that over the next two years, the bank's pre-tax return on tangible assets may average 0.9% (0.7% after-tax), reflecting a significant improvement from 0.5% (0.6% after-tax) in the last four years. Given the bank's continued focus on improving risk management and controls, Moody's expects UBS' earnings stability to improve.

Further, supporting its strong credit profile, the bank has managed to improve its leverage ratio at a more stable level in comparison to its peers. In this regard, Moody's believes that UBS is likely to sustain or increase its improved leverage ratios, given the recently announced higher regulatory capital requirements by the Swiss government.

Among others, Moody's also noted that the bank remains exposed to several legal charges related to activities including US residential mortgage-backed securities RMBS. However, as UBS has already set significant legal reserves pertaining to US RMBS activities, the risk of the related charges translating to substantial negative impact on earnings or capital is reduced.

Bottom Line

The rating upgrades are valuable for the Swiss banking giant since these preserve investors' confidence in the stock and boost creditworthiness in the market.

UBS has been striving hard for growth with its several restructuring initiatives that include cost reduction measures along with improving capital ratios. The rating upgrades certainly reflect the fact that the company's efforts bore fruit. Nevertheless, we remain cautious as the bank battles with numerous lawsuits and investigations.

Currently, RBS carries a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the foreign bank space include Grupo Financiero Galicia S.A. GGAL and Banco Macro S.A. BMA. While Grupo Financiero sports a Zacks Rank #1 (Strong Buy), Banco Macro carries a Zacks Rank #2 (Buy).

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