UBS almost doubles first-quarter earnings

UBS almost doubled earnings in the first quarter of the year, a feat management said vindicated the bank's decision to overhaul its business far sooner than European rivals who are only now considering strategic overhauls.

Switzerland's largest lender announced sweeping cuts to its investment bank in 2012 and said it would refocus around wealth management. A strong performance from wealth management and the slimmed down investment bank helped UBS to net attributable earnings of SFr1.98bn for the three months to the end of March, up from SFr1.05bn a year earlier and far better than the SFr1.44bn analysts expected.

Shares in UBS rose almost 7 per cent in morning trade in Zurich. "While the first quarter is typically the strongest quarter, our results this quarter were exceptionally good," Sergio Ermotti, UBS chief executive, told analysts and reporters. "The results underline that our business model works, and our approach to thinking long term and acting early is paying off."

Mr Ermotti warned, however, that it would be wrong to annualise the quarter's results to draw inferences about the rest of the year.

Analysts across the board, who were largely critical of the bank's fourth quarter performance, praised the results. "Capital ratios also showed a decent improvement, and with investor focus back again on capital adequacy the ability for UBS's model to sustain a high dividend is clearly attractive," said Jon Peace at Nomura.

"The part of the strategic plan which was announced in late 2012 that had yet to deliver was the cost angle," said Kinner Lakhani, an analyst at Citigroup. "What today's results demonstrate is that some of those centralised cost savings are starting to kick in."

UBS reported cost-income ratio of 69.2 per cent for the first three months, implying 69.2 per cent of its revenues were paid out in operating costs, down from 81.1 per cent a year earlier.

UBS's common equity tier one ratio - a key measure of financial strength - rose from 13.4 per cent at the end of last year to 13.7 per cent at the end of March. Capital is a key issue for the Swiss banks as their lawmakers consider new rules requiring a higher percentage of equity relative to total assets.

The wealth management business delivered pre-tax earnings of SFr951m for the quarter, against expectations of SFr678m and SFr619m a year earlier, as it attracted SFr14.4bn of new client money while existing clients were more active. More than SFr8bn of the new money came from the Asia Pacific region.

UBS warned it could lose some assets as it reviews about SFr30bn of client money that is in overnight accounts, which have become expensive for UBS after the Swiss National Bank implemented negative interest rates. "Our first call would be hopefully to have client behaviour changes too and to retain all the assets," Tom Naratil, UBS chief financial officer, said.

Net margins for invested assets - an important measure of wealth management profitability - rose 0.5 per cent. Mr Naratil stressed that the wealth management business did still face some "headwinds" from the surprise ending of the Swiss franc's peg with the euro in mid January, which caused the franc to appreciate.

Deutsche Bank last week unveiled a strategic overhaul that involves a stronger emphasis on wealth management, while Credit Suisse's incoming chief executive Tidjane Thiam is expected to focus on wealth management when he takes the helm in June. Mr Naratil said that if the sector becomes more crowded "the world's best-scaled player in wealth management is the one who'll be least injured by that development."

UBS's investment bank made pre-tax profits of SFr774m against the SFr467m analysts had expected and SFr425m a year earlier, as high levels of market volatility helped earnings from foreign exchange, rates and credit, equity derivatives and global financing services.

The same volatility lifted first-quarter earnings at UBS's domestic rival Credit Suisse and at several US banks. "The investment bank deserves applause, not only for its excellent profit . . . but also because the results were delivered without increasing our risk profile, and while remaining within the allocated resource limit," said Mr Ermotti, referencing the limits that UBS group has placed on the capital the investment bank can use.

The bottom line results for the first quarter of 2015 were also boosted by a better than expected contribution from UBS's corporate centre, which books central costs and includes the non-core assets the company is disposing of. While corporate centre is not a good indicator of future profitability, earnings there do help boost capital.

The bank also said it was in "advanced talks" with the US Department of Justice to settle allegations it was involved in rigging foreign exchange markets. UBS is one of a number of banks being investigated for allegedly manipulating foreign exchange markets.

"Discussions with DoJ have continued and are at an advanced stage, although no agreement has been reached with the DoJ on the form of a resolution," UBS said. The bank said it believed it has already set aside enough money to deal with any settlements related to foreign exchange activities.

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