RBC Downgrades UBS To Sector Perform; Notes Cost Story Is 'Running Behind'

• UBS Group AG (USA) UBS shares have been heading south, and have lost 34 percent since August 3.
• RBC Capital Markets’ Fiona Swaffield downgraded the rating for the company from Outperform to Sector Perform, while reducing the price target from CHF 22 to CHF 17.
• Significant reduction in expectations for dividend growth as well as yield call for the downgrade in rating, Swaffield stated.

The prospect of better dividend growth than peers had been among the “key attractions” of UBS, analyst Fiona Swaffield said. She added, however, that the prospects of special dividends in 2016 were limited.

UBS is expected to face earnings challenges in 2016 and there is only limited scope for DPS growth versus prior expectations, Swaffield commented, while projecting a stated payout of 72 percent for 2016. Although the estimated 2016 yield, at 4.5 percent, is superior to the company’s Investment Banking peers, it is not “especially high in a sector context.”

Although UBS has implemented most of its restructuring plan, cost benefits are not yet visible. The company recorded net cost savings of CHF1.1bn in 2015, versus its target of CHF1.4bn, and these saving are “hard to see” given an adjusted cost income ratio of 77 percent in 2015, down from 79 percent, the analyst pointed out.

In the report RBC Capital Markets noted, “Given a more difficult revenue environment and continued regulatory costs we expect this to remain stable in 2016E and fall to 75% in 2017E, the top end of the short to medium target range.”

The adj. diluted EPS estimates for 2016 and 2017 have been reduced from CHF 1.54 to CHF 1.31 and from CHF 1.88 to CHF 1.54, respectively. Guidance of a decline in retained funding costs “is no longer explicit,” while this was “a key driver of growth.” Moreover, WM’s revenue trends are likely to be impacted by markets and deleveraging, while UBS continues to invest, Swaffield mentioned.