UBS Downgraded To Underperform At BofA; Here's Why

• UBS Group AG (USA) UBS has seen a 16.52 percent decline in its share price over the past three months, from $23.12 on August 3.
• Andrew Stimpson of Bank of America Merrill Lynch has downgraded the rating on the company from Buy to Underperform, while lowering the price objective from CHF 23 to CHF 19.
• Stimpson believes that the stock’s investment case has been hurt by UBS’ decision to increase its balance sheet targets and leverage exposure, in response to the increased leverage requirements.

Analyst Andrew Stimpson explained that UBS’ investment case “has been built on the shrinkage of the Investment Bank and the continued commitment to limiting the size of the IB, allowing the higher-multiple units to grow and dividends to flow to shareholders.”

However, the company’s decision to increase its leverage exposure and increase its balance sheet target by CHF 50 billion in RWA is likely to lead to a near term decline in capital distribution.

Stimpson also expects this decision, along with the departure of the CFO, to damage UBS’ rating.

The company has, however, posted in-line results for 3Q15, with the underlying PBT in-line with the consensus expectations, “as another good performance from the IB balanced small misses from WM, GAM and the corporate center,” the Bank of America report stated.

The CET1 leverage ratio and RWA missed the consensus forecasts. “We had hoped the company would delever in response to the stricter too-big-to-fail rules announced in Switzerland,” Stimpson added.

Although the Wealth Management segment posted a disappointing PBT, the gross margin was in-line with the estimate. Reported inflows were, on the other hand, “very weak.”