UBS Global I/O: Global Banks 24 July 2018Contents
OUR THESIS IN PICTURES ........ 4
Executive summary .. 5
Sentiment fading but still positive .... 5
Views on fundamentals ....... 6
Trade war impact ..... 7
Views on valuations . 8
Investment strategy . 8
UBS in-house banking survey ....... 14
Sentiment fading but remains positively skewed .... 14
Developed market outlook less optimistic .. 14
EM outlook – less optimistic ........... 15
Macro views ........... 17
Macroeconomic issues still dominate ......... 17
Political risk17
Inflation and interest rates . 17
Regulatory and policy issues ........... 17
Competition .......... 18
Views on fundamentals ..... 19
Loan growth expectations .. 19
NIM outlook .......... 20
Asset quality .......... 23
Earnings outlook .... 24
Branch rationalisation ........ 25
Trade war impact . 27
Potential fundamental implications27
Potential earnings impact ... 28
Views on valuations ........... 30
Under-performance year to date .... 30
Fair value or cheap ........... 30
The UBS Global I/O initiative engages analysts from around the world in a
collaborative effort to offer our leading global equity research (“Input”)
along with investment ideas (“Output”) in multiple regions concurrently.
Philip Finch
Strategist
philip.finch@ubs
+44-20-7568 3456
Giovanna Rosa
Associate Analyst
giovanna.rosa@ubs
+55-11-3513 6568
Brennan Hawken, CPA
Analyst
brennan.hawken@ubs
+1-212-713 9439
Shinichi Ina
Analyst
shinichi.ina@ubs
+81-3-5208 6227
Saul Martinez
Analyst
saul.martinez@ubs
+1-212-713 2491
Jonathan Mott
Analyst
jonathan.mott@ubs
+61-2-9324 3864
Jason Napier, CFA
Analyst
jason.napier@ubs
+44-20-7568 5037
Brock Vandervliet
Analyst
brock.vandervliet@ubs
+1-212-713 2382
May Yan
Analyst
may.yan@ubs
+852-2971 7157
UBS Global I/O: Global Banks 24 July 2018Global Banks
UBS Research THESIS MAP MOST FAVOURED LEAST FAVOURED
CMA, BAP, Danske, DBS, ING, JP Morgan, Lloyds, Northern Trust, Pekao, SMFG Bank of Ozarks, DB, Fifth Third, HSBC, PNFP,SanChile, SMTH, VTB, Westpac, YES
PIVOTAL QUESTIONS Q: How could a trade war impact banks
With the US-China trade war escalating, and our macro team estimating a potential 108bp hit to
global growth (click here), our UBS 3Q18 in-house banking survey looks at what this could mean for
banks. According to our survey, 50% of respondents believe the impact for banks would be indirect
via weaker loan growth arising from lower GDP growth while 22% expect it to be via higher cost of
equity arising from risk aversion. Our survey also indicates that the direct impact on bank earnings is
likely to be low-to-moderate (69%) or moderate (28%) with only 3% expecting a moderately high
impact (Hungary).
Q: Where are we in the cycle
The flatter yield curve, sluggish lending and muted capital markets activities have raised the question if
US banks are late in the cycle. We think it is too early to conclude this, but acknowledge early
expectations of the tax reform's second order effect were too optimistic. Elsewhere, with growth not
rebounding, the rate cycle in Eurozone is being pushed out, while in EM, weaker economic surprise
indices alongside deleveraging in China suggest the banking sector has yet to the start of a new cycle.
(click here).
Q: Are M&A set to pick-up
In the US, M&A announcements exceeded US$1tn in 2Q18 for the third quarter in a row,
underpinning a robust outlook for M&A fees and corresponding opportunities for revenue generation
(lending/equity issuance to fund the deal, hedging requirements – click here). Concurrently, the build-
up of capital by some banks in the US (notably mid-cap names) and in Japan suggests we could see a
pick-up in bank acquisitions (click here).
WHAT'S PRICED IN Current valuations suggest the market is expecting a c4% fall in earnings. Earnings
momentum has turned negative in recent months, weaker loan growth and margin expectations:
since April 2018, our 2018 EPS growth estimates for global banks have eased by 1.6%.
UBS VIEW Risk appetite towards the sector has started to fade with trade war uncertainties: We want to
see the return of positive earnings momentum before becoming more constructive on the sector.
Currently, global banks trade on 9.7x PE and 1.2x P/BV while offering a dividend yield of 3.8%, based
on 2018 estimates.
EVIDENCE How could a potential trade war impact your banks
Source: UBS estimates
0%
10%
20%
30%
40%
50%
60%
Lower trade finance
revenues
Weaker loan growth
(via lower GDP)
Higher asset quality risk
(via weaker GDP)
Higher CoE (via risk
aversion)
DevelopedEmerging
UBS Global I/O: Global Banks 24 July 2018Global Banks UBS Research
OUR THESIS IN PICTURES return
Our latest in-house banking survey shows sentiment
towards the banking sector has started to fade,
although still positively skewed
Although UBS banks analysts have a net positive view on
the banking outlook, it has fallen in four of the last five
quarters
According to our UBS in-house banking survey, only 3%
of respondents expect the trade war to have a
moderately high impact on earnings
At 10.0x PE, global banks’ valuation is c4% below its
historical average of 10.4x
Sources for exhibits above: UBS, UBS Evidence Lab, I/B/E/S MSCI Aggregates, Datastream
0%
10%
20%
30%
40%
50%
Very cautiousSlightly
cautious
NeutralSlightly bullishVery bullish
Currently view on the outlook for bank sector
Mar-2018Latest
-30
-20
-101030
Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
-20Sep
-20De
c-2
01Ma
r-2
01Jun
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01Lat
est
UBS net view on the banking outlook
PositiveNegativeNet positive
0%
10%
20%
30%
40%
50%
60%
70%
12345
Trade war: potential impact on banks' earnings
DevelopedEmerging
Low
Moderate
High
6.0
8.0
10.0
12.0
14.0
16.0
Jul
-08
Jan
-09
Jul
-09
Jan
-10
Jul
-10
Jan
-11
Jul
-11
Jan
-12
Jul
-12
Jan
-13
Jul
-13
Jan
-14
Jul
-14
Jan
-15
Jul
-15
Jan
-16
Jul
-16
Jan
-17
Jul
-17
Jan
-18
Jul
-18
Global banks 1-year forward consensus PE
Current (9.97)Average (10.38)+2SD-2SD。