UBS Results: Cost Guidance and Challenging Revenue Outlook Points to Fiscal 2023 Earnings Decline

UBS' new 2%-3% operating expense growth guidance for 2023 stood out from its results call for fourth-quarter 2022. We believe it will be challenging to achieve revenue growth to offset this increase. Given UBS's high fixed-cost base, it has a very high degree of operating leverage, which will significantly magnify the impact of flat or declining revenue on its bottom line. We believe that investment banking revenue reached a cyclical high in first-quarter 2022 and that the normalisation we saw in the final quarter will continue into 2023. Higher net interest income should partially offset some of this decline, but the outlook for fee income from wealth and asset management remains constrained by market valuations. We do not foresee making a material change to our CHF 22.50/share fair value estimate for UBS. After a 22% rally in its share price over the last three months, we see limited further upside potential.