UBS Profits, Outflows Fall – Analyst Blog

UBS AG (UBS) has posted its third consecutive quarter of net profit aided by strong contribution from its Investment Bank division and a drop in client money outflows.

UBS AG reported a second quarter net profit of CHF 2.0 billion ($1.9 billion) compared with a profit of CHF 2.2 billion in the prior quarter and a loss of CHF 1.4 billion in the year-ago quarter. Operating income increased to CHF 9.2 billion from CHF 9.0 billion in the prior quarter and CHF 5.8 billion in the year-ago quarter.

Solid results at its Investment bank division were achieved partly due to the CHF 595 million gain from its own debt. Equities revenues and foreign exchange revenues were up in the quarter, though weak performance in the fixed income, currencies and commodities trading business was on the downside. Pre-tax profit increased to CHF 1.3 billion from CHF 1.2 billion in the prior quarter.

We are also encouraged to see the moderation of outflows in the quarter. UBS AG reported a decline in net new money outflows to CHF 4.7 billion from CHF 18.0 billion in the prior quarter.

Net new money outflows at the Wealth Management division decreased to CHF 5.2 billion from CHF 8.0 billion in the prior quarter. While this division continued to experience net inflows from the Asia-Pacific region, net outflows continued in Europe though it has somewhat moderated from the prior quarters.

Net new money outflows in the Retail & Corporate division were CHF 0.3 billion, compared with CHF 0.2 billion in the prior quarter. Outflows at Wealth Management Americas decreased to CHF 2.6 billion compared with CHF 7.2 billion in the previous quarter. However, Global Asset Management division reported inflows of CHF 3.4 billion, versus outflows of CHF 2.6 billion in the last quarter.

Reflecting unfavorable market movements, UBS AG’s invested assets were down by 4% sequentially to CHF 2,180 billion on June 30, 2010.

UBS AG’s capital ratios slightly improved in the quarter. Tier 1 capital ratio was 16.4%, up 40 basis points from the prior quarter, while risk-weighted assets decreased 2% to CHF 204.8 billion. Core Tier 1 capital ratio increased to 13.0% from 12.5% over the same period.

Outlook

UBS AG gave a cautioned outlook. The company expects restrained client activity levels across it businesses as a result of the concerns hovering around market recovery and its sustainability. Volatility is anticipated to continue and the company projects its portfolio management fee income to fall from the second quarter levels on the back of reduced level of invested assets at the end of June.

Swiss Parliament Approval on Client Detail Sharing

Last month, the Swiss parliament voted in favor of the deal that would allow the sharing of banking data of 4,500 clients of UBS AG with the U.S. government. The clients are alleged to have evaded American taxes. Following this approval, the company expects to sort out all outstanding matters with the US government in connection with the US cross-border business by October this year.

Competitor

Last week, UBS AG’s rival, Credit Suisse Group (CS) reported second quarter profit of CHF 1.6 billion, primarily due to tax and accounting gains. However, its investment banking results were not impressive.

Our Take

The global economic turmoil had a severe impact on the Swiss banking major’s balance sheet when the subprime crisis led to record losses. Additionally, the issues emanating from alleged tax evasion investigation and the dilution of Swiss banking secrecy significantly impacted UBS AG’s performance in the past several quarters, as worried clients looked for a safer refuge.

However, with the Swiss parliament’s approval to the data-sharing deal, we believe the uncertainties have somewhat been tackled. Increasing profitability and decreasing outflows remain UBS AG’s top priorities. The company has taken several restructuring initiatives and we expect them to support its results in the upcoming quarters. Yet we believe the volatile capital market conditions to restrict the top line growth to some extent in the near term.
 
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Zacks Investment Research
July 27, 2010 | Filed Under Analyst Opinions 

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