UBS beats estimates… and is punished

UBS announced third quarter net income beating estimates and their share price has fallen ~6%. This is probably confusing to most people, surely it is illogical?

The story
Net income more than doubles to 2.07bn from 762mn year previous it is announced they will beat this year’s target of 10% return on tangible equity. Investment banking pretax profits are 166mn above estimates and revenue from equity trading rose to 944mn compared to estimate of 916mn.

Why is this negative?
Despite these positive figures the reason the market is acting negatively is because of the financials behind the figures and underlying regulatory uncertainty.

Tax Credits
The main cause of such a rise in net income is mainly due to a 1.3bn claim on a tax credit, a result of earlier losses made by the bank. Therefore general growth seems muted when the credit is removed.

Asia Growth
Sergio Ermotti placed an emphasis on growth in Asia in his report. This is met with more mixed reviews than it would have a few years ago, due to current uncertainty about poor Chinese growth in the area.

Stricter regulation
Switzerland has some of the strictest regulations for the financial industry. Sergio Ermotti suggests the new restrictions will see clients paying more for their products and shareholders receiving less value. These future prospects and further uncertainty to the regulatory environment in Switzerland are not aiding the share price.

Target returns
UBS has pushed back its target return on tangible equity (15%) to 2018 from 2016, indicating lower growth over the coming years.

Remember the share price of a stock is based on the value of its future earnings. With growth fears in China, stricter regulation reining in expected returns and tax credits only providing a one-off temporary boost to net income, the expectation of UBS’s future earnings are not as strong as the headline earnings growth shows.

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