UBS Beats Estimates on Investment Bank, Wealth Management

By Elena Logutenkova

UBS AG (UBSN), Switzerland’s biggest bank, reported first-quarter earnings that beat analyst estimates on higher revenues at the investment bank and in wealth management.

Net income fell to 988 million Swiss francs ($1.05 billion) from 1.04 billion francs a year earlier, the Zurich-based bank said in a statement today. That surpassed the 412.3 million- franc mean estimate of nine analysts surveyed by Bloomberg. Chief Executive Officer Sergio Ermotti announced 10,000 job cuts and the exit of most debt-trading businesses at the investment bank last year to concentrate UBS on money management and boost profitability. UBS is trading at a higher price relative to estimated earnings and book value than Credit Suisse Group AG as investors back the company’s focus on wealth management.

“We like UBS,” Matt Spick, a London-based analyst at Deutsche Bank AG, said in a note before today’s release, raising his recommendation to buy from hold. The quarter may be “the first, early validation of the new more focused UBS strategy.”

UBS has risen 20 percent to 15.71 francs in Swiss trading over the past six months, compared with a 13 percent gain in the Bloomberg Europe Banks and Financial Services Index of 40 companies.

“It’s too early to talk about vindication or to declare victory, but I think I’m extremely pleased with the progress we made so far in executing our strategy,” Ermotti, 52, said in an interview with Bloomberg Television. “It’s working. I’m very pleased to see that clients are responding well to the strategy.”

Investment Bank

The investment bank posted a 92 percent gain in pretax profit to 977 million francs, beating the average analysts’ estimate of 321 million francs. The unit, which aims for an annual pretax return on equity of more than 15 percent, reported that measure of profitability at 49.5 percent for the quarter, up from 17 percent a year earlier.

“The strategy of the new investment bank works with two- thirds less capital allocation than a year ago,” Ermotti said.

Revenue at the securities unit rose 21 percent from a year earlier to 2.79 billion francs, helped by gains in equities and equity capital markets, which rose 17 percent to 1.17 billion francs and more than doubled to 503 million francs, respectively. Equities revenue included a 55 million-franc gain from the sale of a part of UBS’s former proprietary stock- trading desk, which the bank closed last year, while equity capital markets business benefitted from a large private transaction, the bank said.

New Money

Earnings in wealth management fell 28 percent to 664 million francs on higher costs, after profit a year ago benefitted from a reduction in expenses related to changes in the company’s Swiss pension plan.

The division attracted 15 billion francs in net new money from investors in the quarter, the biggest amount since 2007. The gross margin, a measure of how much revenue UBS makes on assets, rebounded by 6 basis points from the last quarter of 2012 to 91 basis points. A basis point is a hundredth of a percentage point. All regions had positive inflows.

UBS saw an increase in client risk appetite in the first few weeks of the year, Ermotti said in the interview, while the re-emergence of the European sovereign-debt crisis with the situation in Cyprus damped that.

Wealth Management

Juerg Zeltner, who heads UBS wealth management outside the Americas, said in an interview earlier this month that the revamp of the investment process the company has been undertaking since hiring Chief Investment Officer Alexander Friedman is helping the bank compete globally. Zeltner plans to expand the onshore business in Europe and invest in hiring and technology in Asia and emerging markets, where he doesn’t exclude acquisitions.

Wealth management is “the business that will drive the share price because that’s the one that attracts the highest valuation,” Christopher Wheeler, a London-based analyst at Mediobanca SpA, said before today’s release.

UBS is educating client advisers to make sure investment recommendations are followed through and rolling out a new offering for clients, where they would be charged a fixed fee for advisory services rather than commissions on each transaction.

Profit at the wealth management Americas unit rose 22 percent to 234 million francs, as the business, run by Robert McCann, attracted $9.2 billion in net new money.

The retail and corporate division posted a 48 percent drop in pretax profit to 347 million francs, as year-earlier figures were boosted by changes in the Swiss pension plan, while asset management increased earnings 12 percent to 190 million francs.

To contact the reporter on this story: Elena Logutenkova in Zurich atelogutenkova@bloomberg.net

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