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Profits Rise At UBS's Wealth Management Business

Tom Burroughes

26 July 2011

Pre-tax profits at the wealth management businesses of UBS improved in the second quarter from the first three months of the year in all regions, including the Americas, while its performance was affected by the strong Swiss franc, the Zurich-listed bank said today.

Meanwhile, the Swiss banking and wealth management giant said its original profits target, as set in 2009, was unlikely to be met amid difficult economic conditions.

In comments later reported by the Financial Times, Oswald Grubel, group chief executive, said the firm's investment banking arm - which in recent years had suffered massive losses linked to the US sub-prime mortgage meltdown - would focus on supporting UBS's wealth management arm rather than trying to compete with global rivals in capital-intensive areas. (Although the FT report did not mention this, Switzerland insists on tougher capital reserves from banks than is the case under the international standards laid down by the Basel III accords).

Wealth management’s pre-tax profit was SFr672 million (around $838.4 million), up by 4 per cent from the previous quarter. Lower income due to lower invested asset levels and reduced client activity was more than offset by reduced operating expenses. Total operating income fell 3 per cent to SFr1.867 billion from SFr1.928 billion in the previous quarter, reflecting lower fee and net interest income.

Net new money was positive for the fourth consecutive quarter, with net inflows of SFr5.6 billion compared with net inflows of SFr11.1 billion in the previous three months.

For the whole of UBS, covering all business divisions, second-quarter net profit attributable to UBS shareholders was SFr1.015 billion, up from SFr1.807 billion in the first quarter. A stronger Swiss franc hit revenues, as did lower trading income in the firm’s fixed income, currencies and commodities business. This fall in revenues was only partially offset by lower staffing and other costs. The group had a total of SFr2.1 trillion of invested assets as at the end of June; its BIS capital ratio stood at 18.1 per cent, up from 17.9 per cent in the previous three months.

Oswald Grübel, group chief executive, said the economic backdrop to the results had been tough.

"Banks’ returns have declined overall in the last 12 months, reflecting de-leveraging and the actions being taken in advance of increased capital requirements. We are responding to this changed environment and the weakening economic outlook by adapting our business and increasing efficiency. While our target for pre-tax profit set in 2009 is unlikely to be achieved in the original timeframe, our strong competitive positioning and our capital strength give us confidence for the future," he said in a statement today.

Returning to the wealth management segment, UBS said the business had continued to see net inflows in the Asia-Pacific region and emerging markets, as well as globally from ultra high net worth clients. UBS’s European onshore business reported continued net inflows, while its European cross-border business recorded net outflows mainly from the cross-border business related to neighbouring countries of Switzerland.

Invested assets were SFr748 billion on 30 June 2011, a decrease of SFr43 billion from 31 March. This was mainly due to a decrease in the value of the dollar and the euro against the Swiss franc.

Wealth Management Americas’ pre-tax profit improved to SFr140 million in the second quarter from SFr111 million in the first quarter. Total operating income decreased 5 per cent to SFr1.284 billion from SFr1.347 billion. In dollar terms, operating income increased 4 per cent due to improvements in fee and interest income, as well as higher realised gains on sales of securities held as available-for-sale.

Second quarter net new money was SFr2.6 billion, compared with SFr3.6 billion in the first quarter. Second quarter net new money was affected by annual client income tax payments, which contributed to a decline in net inflows among financial advisors employed with UBS for more than one year. Net recruiting of financial advisors was the primary driver of net new money in the second quarter.

The gross margin on invested assets in Swiss franc terms declined 2 basis points to 76 basis points, reflecting a 5 per cent drop in income compared with a 3 per cent decline in average invested assets.