UBS Profit Beats Estimates on Lower Legal Costs, Tax Gain

Feb 04, 2014 8:19 am ET

(Updates with payout as share of profit in sixth paragraph.)

Feb. 4 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, reported fourth-quarter profit that beat analysts’ estimates, helped by higher earnings at its main divisions as well as lower legal costs and a tax gain. The company plans to increase its dividend by 67 percent for 2013.

UBS rose the most in nine months in Zurich trading after posting net income of 917 million Swiss francs ($1.02 billion), double the 442 million-franc average estimate of analysts. UBS had a loss of 1.9 billion francs in the year-earlier period after paying fines for trying to rig global interest rates.

UBS, which has scaled back its investment bank in favor of wealth management under Chief Executive Officer Sergio Ermotti, boosted profit at both in the quarter. A decline in legal costs and a 470 million-franc tax gain also helped results, allowing UBS to raise its common equity ratio under fully-applied Basel III capital standards to 12.8 percent. That’s approaching the 13 percent level where Ermotti has pledged to begin paying out more than 50 percent of profit to shareholders.

“The increase in the capital ratio is a positive surprise,” which reinforces dividend prospects at UBS, said Andrew Stimpson, a London-based analyst at Keefe Bruyette & Woods Ltd. “Lower litigation expenses helped drive the result.”

UBS shares jumped as much as 6 percent, the biggest intraday gain since April 30, and were up 5.4 percent at 18.40 francs by 1:57 p.m. The stock is 8.8 percent higher this year.

Dividend, Bonuses

UBS proposed increasing the dividend for 2013 to 25 centimes a share from 15 centimes, above the 20-centime average estimate of analysts surveyed by Bloomberg. The payout amounts to about 30 percent of the bank’s full-year net income of 3.17 billion francs. UBS had a 2.48 billion-franc loss in 2012.

UBS also boosted its bonus pool, including pay deferred into the future, by 28 percent to 3.2 billion francs for 2013.

The bank, which was ordered by the Swiss regulator to boost the capital it sets aside for litigation as of October, said today it reached an agreement with the watchdog that trims that need for extra funds by about 18 percent.

The Swiss Financial Market Supervisory Authority agreed as of Dec. 31 to use a “supplemental analysis” to calculate how much more risk UBS needs to assign to assets related to legal and regulatory matters, the bank said. This will result in an increase of 22.5 billion francs to risk-weighted assets, about 5 billion francs less than would have been the case under the previous order, UBS said. As risk-weighted assets rise, the bank has to hold more capital.

Legal Costs

Future developments and the elimination of the additional risk-weighted assets will depend on the bank’s provisions for litigation and the developments in legal matters, UBS said. The company said it expects legal charges to remain “at elevated levels” this year.

The bank set aside 79 million francs in legal provisions in the fourth quarter, bringing the total for the year to 1.7 billion francs. Morgan Stanley analysts had forecast about 500 million francs in such provisions by UBS for the quarter, while Vontobel analyst Andreas Venditti predicted 400 million francs.

UBS’s wealth management unit reported an 18 percent increase in pretax profit to 471 million francs in the quarter from 398 million francs a year earlier, while wealth management Americas posted a 62 percent gain to a record $254 million from $157 million. The units attracted 5.8 billion francs and $4.9 billion in net new money in the quarter, respectively.

Costs Rise

The combined annual pretax profit of the two wealth management units, adjusted for reorganization charges and credit related to changes in employee pension plans, was the highest since the financial crisis, UBS said. The bank wants to continue expanding its market share in wealth management, Ermotti, 53, said in a Bloomberg Television interview.

Wealth management costs in the quarter, which rose 2.9 percent from the year-earlier period to 1.39 billion francs, were higher than expected, Stimpson said.

Chief Financial Officer Tom Naratil told analysts on a conference call that the increase is partly due to UBS’s decision to book some expenses from deferred compensation in 2013 rather than this year. The bank is sticking to a target of reducing the unit’s cost to between 60 percent and 70 percent of income as it expands the business while trying to improve efficiency, Naratil said. That ratio was at 75 percent in the quarter and at 70 percent for the year.

Investment Bank

Asset management earnings declined 12 percent to 130 million francs, while the retail and corporate business saw profit fall 8 percent to 332 million francs. Ermotti said that Ulrich Koerner, who took over this year as head of asset management, is evaluating how to boost profitability in the business.

The investment bank posted a 297 million-franc profit, compared with a loss of 243 million francs a year earlier. Revenue from equities trading jumped 58 percent to 858 million francs in the quarter from a year earlier, while foreign exchange, rates and credit saw revenue fall 2.3 percent to 297 million francs. The corporate client solutions unit, which includes advisory, underwriting and financing services, reported a 7.5 percent decline in revenue to 706 million francs.

JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp., Morgan Stanley and Deutsche Bank AG reported a 7.7 percent decline in cumulative fourth-quarter revenue from fixed income and a 5.2 percent gain in equities, compared with a year earlier, data compiled by Bloomberg Industries show. The figures exclude valuation adjustments. The cumulative revenue at the firms from advising on mergers and acquisitions and underwriting of stock and bond sales gained 8.4 percent in the quarter, the data show.

Currencies Probe

The company reported a return on equity of 6.7 percent for 2013. Ermotti told analysts and journalists on a conference call that the bank expects a similar return this year, primarily because of litigation costs. He reiterated that UBS may not achieve its ROE target of 15 percent until 2016 because of the regulator’s order to hold more capital for legal risks.

Deutsche Bank, Germany’s biggest bank, last month posted a fourth-quarter loss on legal costs and accounting charges. The Frankfurt-based lender paid to settle a lawsuit alleging it deceived clients about products linked to U.S. mortgages and a probe into traders colluding to rig benchmark interest rates.

Deutsche Bank and UBS are among companies responding to regulatory probes into possible foreign exchange manipulation. Investigators from Switzerland to Hong Kong are probing currency markets after Bloomberg News reported in June that dealers said they shared information on client orders with counterparts at other banks and timed trades to influence prices at the close.

Admitting Mistakes

“We are still working with all the authorities and the regulators on this matter,” Ermotti said in the Bloomberg Television interview. “We really have an interest ourselves to resolve these issues very quickly and swiftly and to get clarity and take appropriate actions where necessary.”

Ermotti also said that making predictions on when and how much UBS may be able to provision for legal matters is “difficult.”

Banks need to admit to past mistakes and assume responsibility for them to improve their reputation, UBS Chairman Axel Weber said in a Jan. 22 interview with Bloomberg Television at the World Economic Forum in Davos, Switzerland.

“We do all the legal settlements that are needed to get out of this past,” Weber said. “Only if you admit mistakes and remediate them you do actually have a chance to shape your future. I think we’re pretty well advanced in that process.”

--Editors: Frank Connelly, Mark Bentley