UBS Lifts Earnings By 5% But Warns On Swiss Franc

UBS Lifts Earnings By 5% But Warns On Swiss Franc
By twicepix ( [CC BY-SA 2.0], via Wikimedia Commons

UBS reported its results for the three months ending Dec. 31, posting a profit of 963 million Swiss francs or about $1.04 billion

UBS beat analysts’ fourth-quarter estimates thanks to a significant tax benefit and strong investment banking results, though the Swiss bank warned about the impact of the surging Swiss franc. UBS also benefited from lower provisions for potential litigations.

UBS results beat analysts’ estimates

On Tuesday, the Swiss bank unveiled its results for the three months ending Dec. 31, posting a profit of 963 million Swiss francs or about $1.04 billion, up from a profit of 917 million francs in the same period a year earlier. UBS’ results exceeded analysts’ expectations. The jump in its fourth-quarter profit by 5% was aided by lower provisions for potential litigation and a tax benefit of 493 million francs.

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The Swiss bank also booked significantly lower costs for potential litigation and regulatory matters after its third quarter results had been reduced by 1.84 billion francs in legal costs. UBS recorded legal provisions of 176 million francs in the fourth quarter. UBS said for the full year, its profit rose 13% to 3.6 billion francs.

The Swiss bank’s net interest income rose 21% to 1.87 billion francs in the fourth quarter, while total operating income rose 7% to 6.76 billion francs.

UBS strikes cautionary tone

Despite lower legal costs than in the previous quarter, UBS struck a cautionary note by indicating that it expects legal and regulatory costs will “remain elevated for the foreseeable future” for the industry and that the bank continued “to be exposed to a number of significant claims and regulatory matters.”

UBS also disclosed that it had received inquiries from the Securities and Exchange Commission and federal prosecutors in Brooklyn regarding the possibility of illegal sales of so-called bearer bonds and other unregistered securities to people in the U.S. The Swiss bank also warned that Switzerland’s move in January to abandon measures that held down the value of the franc in relation to the euro could hurt its profit in the future.

A spokesperson for UBS said, “The increased value of the Swiss franc relative to other currencies, especially the U.S. dollar and the euro, and negative interest rates in the eurozone and Switzerland will put pressure on our profitability and, if they persist, on some of our targeted performance levels.”

Omar Fall of Jefferies expressed concern about UBS’ organic growth and margin performance in wealth management in today’s research report titled “A Poor Outcome Where It Matters.”  In the fourth quarter, UBS posted pre-tax income of 646 million francs in the wealth management division, showing a jump of 37%. However, it slipped 8% to 211 million francs for that business in the Americas.

The Jefferies analyst notes that UBS’ wealth management PBT was 4% below consensus, with forward KPIs of both gross margin of 82 basis points and net new money of CHF 3 billion missing substantially. Moreover, the analyst points out that wealth management in the U.S. is 18% behind thanks to higher expenses.

In the investment bank, UBS’ pretax income rose 24% to 367 million francs in the fourth quarter. The Jefferies analyst notes that I-Bank did better than anticipated, though FICC was down 8% YoY while advisory was up 1% YoY.

At the end of the third quarter, UBS’ common equity Tier 1 capital ratio rose to 13.4% from 12.8% in the same period a year earlier. Fall also notes that the reported CET1 is 20 basis points lower than consensus.

The Jefferies analyst assigned a Hold rating on UBS and pegged the price target at CHF18.30.

Following UBS’ warning about the impact of the surging Swiss franc and negative interest rates in Switzerland and the Eurozone, its shares traded lower at CHF 16.54.

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