UBS Signals Reversal on Attractive Valuations

UBS Signals Reversal on Attractive Valuations

 
Last month, Switzerland’s largest lender UBS AG (NYSE: UBS) was hitting the headlines for the wrong reasons. In the first-half of May, the stock tumbled after GIC Private, the Singapore-based Sovereign Wealth Fund, trimmed its stake in the bank, while expressing disappointment over the fundamental change in the strategy of UBS. In the second-half of May the renowned leader in wealth management took a controlling stake in Consenso Investimentos, a privately run Brazilian wealth management company. The disappointed investors sold the stock. That pushed the share price to a low of about $15.80, from a high of $17.69 in early May. However, the strong quarterly performance and admirable strategy detailed below indicates that the stock would bounce back soon.

The fiscal 2017 first-quarter net interest income declined marginally to CHF1.696 billion, from CHF1.712 billion in the similar period last year. However, a 42% y-o-y increase in the trading income enabled UBS to post 1Q17 operating income of CHF7.532 billion, up from CHF6.833 billion in the year-ago period. Net trading income increased to CHF1.44 billion in the recent quarter, from CHF1.013 million in the prior-year similar period.

In the quarter ended March 2017, net profit increased 79% to CHF1.27 billion, from CHF707 million in the same period of 2016. On average, the Wall Street analysts expected UBS to post earnings of CHF919 million.

At the end of Q1 2017, the CET1 ratio of the bank was 14.2%. The leverage ratio was 3.55%. The loss absorbing capacity of the bank was CHF74 billion. The ratios indicate strong financial health of the bank.

GIC Private offloaded 93 million shares in May. That displaced the institution from the position of the topmost investor in UBS. However, GIC continues to hold a sizeable chunk of UBS’ shares, and is currently the fourth largest investor in the Swiss bank. It indicates that GIC has reduced the overall exposure, but has not written off the stock completely.

Likewise, the investment in Consenso has enabled the wealth management segment of UBS to have a footprint in Latin America. It would be beneficial in the long run. Thus, on the basis of an increase in 1Q17 earnings, strong CET1 ratio, and efforts to expand its operations in Latin America, we predict an uptrend in the stock of UBS.

Technically, the stock has violated the descending trend line. Additionally, the stochastic oscillator is out of the bearish zone. Thus, an upswing in the share price is very much a possibility.

UBS - Technical Analysis - 15th June 2017

In order to make hay while the sun shines, we wish to invest in a call option when the stock of UBS trades near $16 in the equity market. For better chances of finishing in the money, we would choose a contract which is valid for about seven trading days from the time of investment.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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