Profits Fall At Wealth Arm Of UBS, But Net New Inflows Strong; Margins Slip

Tom Burroughes

30 July 2014

The wealth management arm of sufffered a 43 per cent fall in operating profit in the three months to end-June, at SFr355 million ($392 million), compared with the previous quarter, while overall group profits fell 13 per cent over the same period to SFr1.218 billion. Meanwhile, its American wealth unit report saw assets over $1 trillion for the first time.

Adjusted pre-tax profit in the quarter was SFr393 million. The figure was affected by provisions for litigation, regulatory and similar matters, the Zurich-listed bank said today. When those charges are taken out, performance was “resilient at SFr684 million”, UBS said. Lombard lending, mandate sales and invested assets all rose, but were offset by lower transaction-based income on low volatility and volumes.

Gross margin on invested assets fell 3 basis points to 84 bps; the adjusted cost/income ratio, the bank said, was above its target range of between 95 and 105 bps. Net new money remained “very strong” at SFr10.7 billion and the bank logged an annualised rate of net new money growth at the upper range of its target. The wealth management arm has an adjusted cost/income ratio of 80 per cent – below a global average for the industry last year of 83 per cent, as Scorpio Partnership, the consultancy, reported recently. (To see that report and its rankings of UBS and other wealth houses, see here.)

The market was slightly disappointed by the figures, at least judging by the share price in the world’s biggest wealth manager: down down 1.15 per cent mid-afternoon yesterday at SFr18.1 per share.

Net new money, buoyed in particular by contributions from ultra high worth clients and from Asia, is encouraging. Less positive is the fall to gross margins; the bank has stuck to its target range, which appears perhaps to be mistaken, said Christopher Wheeler, analyst at Mediobanca.

Wheeler, who said he was an analysts’ conference call with UBS executives about the results, noted that out of a total of SFr157 billion of invested assets in emerging markets, it was unclear from the firm how much of that money might originate with, or be connected to, Russia. (This publication asked Wheeler about the issue, given recent geopolitical tensions and the issue of potential new sanctions against Russia.) UBS did not break down the figures into more discrete amounts. Regionally, SFr171 billion of UBS invested assets are Swiss; SFr238 billion in Asia-Pacific, and SFr352 billion in Europe.

Within the Wealth Management Americas section, adjusted profit was $246 million, while the unit delivered “record revenues”. Operating profits fell 13 per cent quarter-on-quarter to SFr211 million. Invested assets rose above $1.0 trillion for the first time. Operating income increased, reflecting continued growth in managed account fees and higher net interest income.

The Americas business’s operating costs included $44 million of charges related to litigation and regulatory matters. There were $2.5 billion of net outflows in the quarter, mainly as a result of clients taking out money to pay seasonal income tax bills. Total net new money was $3.2 billion. UBS said this business maintained its adjusted cost/income ratio and its gross income on invested assets within its target ranges.
For the entire group, UBS said it booked a total profit of SFr1.218 billion, down 13 per cent on the previous quarter.

The bank said it had a fully applied Basel 3 common equity tier 1 ratio of 13.5 per cent.

Across the entire group, regulatory, litigation and related costs totalled SFr254 million.

Germany
During the quarter, UBS resolved a cross-border tax dispute with Germany. The settlement, including a payment of around €300 million ($402.8 million), concluded the matter. UBS has provided for around SFr120 million related to this issue in its results.

It said that more than 95 per cent of its German clients have either given UBS evidence they are complying with tax or have completed a voluntary compliance programme – UBS said it wants to reach a 100 per cent compliance result by the end of 2014.