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The Market Is Wrong on UBS

By Alex Dumortier, CFA – Updated Apr 5, 2017 at 7:22PM

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Is today's share price move just a relief rally?

Swiss universal bank UBS (NYSE:UBS) reported its third-quarter earnings today, with results in line with expectations ... or published expectations, in any case. Shares rose more than 10% at one point today, against a 2.66% gain for the entire Swiss Market Index. The jump hints at the depth of pessimism that has burdened this stock.

Business- vs. accounting-based gains
It's worth pointing out that the only reason the bank posted a profit at all this quarter is a massive CHF 2.2 billion gain ($1.9 billion at today's exchange rate) booked on its own debt, which was marked down in the market. (How is that possible? See my explanation of mark-to-market accounting.) The banks could well be forced to reverse part or all of those gains at the end of this quarter.

Still, UBS appears to have turned the corner in restoring investor confidence. Multiple rounds of expensive capital raises have lifted the bank's vitals: At 10.8%, UBS's Tier 1 Capital ratio compares smartly with that of U.S. peers JPMorgan Chase (NYSE:JPM) at 8.9%; Bank of America (NYSE:BAC) at 7.55%; and Citigroup (NYSE:C) at 8.2%.

At that price, it's yours
That said, I don't share the market's enthusiasm, which looks precariously balanced on desperation, rather than solidly situated on fundamentals. At 12.5 times the lowest estimate of 2009 earnings (and that's before today's jump in the share price), it would take more than a few obsequious private bankers to get me interested in this stock. Particularly since I expect intense competition for client assets from Bank of America/Merrill Lynch (NYSE:MER), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) in the years to come.

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Alex Dumortier, CFA has no beneficial interest in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor selections. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Stocks Mentioned

UBS Group AG Stock Quote
UBS Group AG
UBS
$14.91 (-3.81%) $0.59
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$44.26 (-2.90%) $-1.32
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.73 (-2.37%) $0.77
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$109.14 (-1.86%) $-2.07
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$301.97 (-3.50%) $-10.95
Morgan Stanley Stock Quote
Morgan Stanley
MS
$81.51 (-3.85%) $-3.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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