UBS stock downgraded by Morgan Stanley on capital concerns

Morgan Stanley (NYSE:MS) downgraded UBS Group AG (NYSE:UBS), a prominent player in the Capital Markets industry with a market capitalization of $97 billion, from Equalweight to Underweight on Wednesday, while lowering its price target to CHF26.00 from CHF28.00. According to InvestingPro data, the stock currently trades near its Fair Value.

The downgrade reflects Morgan Stanley’s reduced buyback assumptions for UBS to $3 billion from 2026 onwards and recent guidance from a sell-side conference. These adjustments have resulted in a 5% average reduction in estimated earnings per share for 2025-2028. InvestingPro data shows that two analysts have recently revised their earnings downwards for the upcoming period, while the company maintains a "GOOD" overall financial health score.

Morgan Stanley now values UBS based on excess capital above a minimum of 16.50%, up from 16% previously. While acknowledging that the capital needed at Group level will increase to 19%, the firm assumes 250 basis points of potential mitigating actions over time.

The research firm examined several potential mitigating strategies for UBS, including increasing double leverage between Group and parent stand-alone up to 110%, upstreaming more excess capital from foreign subsidiaries, and running the parent with a CET1 ratio of 12% rather than 12.5-13%.

Morgan Stanley analysts believe that while UBS will eventually optimize to its new capital constraints, this process will take time, creating a disadvantage compared to global competitors that face less stringent stress tests in the U.S. or no additional capital requirements in Europe. Despite these challenges, UBS has maintained dividend payments for 14 consecutive years, with a 17.7% dividend growth in the last twelve months. Get more insights and exclusive analysis with a InvestingPro subscription, including access to detailed Pro Research Reports covering 1,400+ top stocks.

In other recent news, UBS AG has been navigating significant regulatory developments and capital requirements. The Swiss Federal Council has proposed reforms that could require UBS to raise up to $26 billion in new capital. These changes aim to increase the capital held against its foreign units, potentially adding $23 billion to its Swiss-based main unit. Despite these requirements, UBS plans to maintain its financial targets and shareholder returns, including a 10% dividend increase and share buybacks totaling up to $3 billion by 2025.

UBS has expressed concerns about the proposed capital rules, arguing they are disproportionately high. Nonetheless, UBS is engaging with stakeholders to seek regulatory adjustments. Meanwhile, Jefferies upgraded UBS’s stock rating from Hold to Buy, anticipating positive earnings momentum and an increase in return on tangible equity to 15% by 2027. Jefferies set a new price target of CHF37.00, reflecting optimism about UBS’s capital clarity and growth prospects.

Citi analysts maintained a Neutral rating for UBS, noting the extended transition period for meeting capital requirements. They highlighted ongoing concerns about UBS’s earnings momentum compared to peers. JPMorgan also reiterated its Overweight rating with a CHF37.00 price target, considering potential regulatory impacts on capital requirements and shareholder returns. These developments underscore the evolving regulatory landscape for UBS and its efforts to balance capital demands with shareholder interests.

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