UBS Net Rises 15% as Costs Fall; Settles German Tax Probe

Jul 29, 2014 12:01 pm ET

(Updates with revenue decline in third paragraph.)

July 29 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, reported a 15 percent rise in second-quarter profit on lower costs, and said it settled a German tax investigation.

Net income rose to 792 million Swiss francs ($876 million) from 690 million francs a year earlier, the Zurich-based bank said today. While earnings beat analysts’ estimates, shares fell as much as 2.3 percent as UBS disclosed a U.S. probe into its dark pool private-trading venue and posted lower revenue.

“The beat comes mostly from cost-cutting efforts and lower charges in the corporate center,” Otto Dichtl, managing director at Stifel Nicolaus Europe Ltd., said in an interview on Bloomberg Television. “It’s really all the things a bank does when it’s sort of in a defensive mode. The results are a touch weak, I’d say, on the revenue generation, on growth.”

Chief Executive Officer Sergio Ermotti has made cutting costs by 2.1 billion francs from last year’s level a priority. Profit margins are being squeezed by low volumes in equity markets and a lack of foreign-exchange volatility, the CEO said in a Bloomberg Television interview. Revenue fell 3.3 percent in the quarter to 7.15 billion francs, while costs declined 6.9 percent to 5.9 billion francs.

UBS ended the day 1.8 percent lower at 16.32 francs in Swiss trading. The stock is down 3.5 percent this year, compared with a 1.2 percent increase in the Bloomberg Europe Banks and Financial Services Index, which tracks 43 companies.

UBS is seeking to boost return on equity, a measure of profitability, to more than 15 percent by 2016 from 7.6 percent in the first half of this year.

German Settlement

The bank paid about 302 million euros ($406 million) to authorities in Bochum, Germany, to settle an investigation into whether it helped Germans evade taxes. It set aside about 120 million francs for the settlement in the quarter, it said. Separate proceedings by authorities in Mannheim, Germany, haven’t revealed enough evidence to support the allegations being investigated, UBS said today.

The bank took 441 million francs in fresh legal provisions in the quarter, bringing the total to 1.98 billion francs.

Pretax profit from wealth management fell 36 percent to 355 million francs from a year earlier. That missed the 671 million- franc estimate of analysts, as UBS set aside 295 million francs in legal provisions at the division.

The unit added 10.7 billion francs in net new money, exceeding estimates. Wealth Management Americas saw earnings fall 9 percent to 211 million francs, with net outflows of 2.2 billion francs.

Margin Narrowed

Gross margin in wealth management, which measures how much revenue the unit produces relative to the assets it oversees, shrank 3 basis points from the previous quarter to 84 basis points. A basis point is a hundredth of a percentage point.

Earnings in asset management fell 24 percent to 105 million francs, while the retail and corporate unit posted a 6.1 percent decline to 354 million francs.

UBS, the world’s biggest wealth manager, decided to scale down its investment bank in 2012. The unit’s profit fell 25 percent to 579 million francs in the quarter. Even so, earnings surpassed the 511 million-franc average estimate of analysts, helped by revenue from bond and stock sales.

The loss at the corporate center shrank to 387 million francs from 1.06 billion francs last year, as losses from assets that UBS wants to exit more than halved.

U.S. competitors including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley posted higher income than expected in the second quarter as revenue from fixed-income trading fell by less compared with last year than analysts had previously estimated. The banks also profited from higher underwriting and advisory fees in the quarter, data compiled by Bloomberg Intelligence show.

Dark Pools

Credit Suisse Group AG, the second-largest Swiss bank, reported a loss of 700 million francs last week after a 1.6 billion-franc charge from settling a U.S. tax investigation. It posted higher-than-forecast earnings at the investment bank and lower profit in wealth management, even as it attracted more money from rich clients than analysts had estimated.

UBS is grappling with its own regulatory probes. The bank said today the U.S. Securities and Exchange Commission is looking into certain features of its dark pool in an investigation that started in early 2012. The bank said it has discontinued certain order types and disclosure practices that the SEC is examining.

Dark pools are alternative trading systems where transactions are concealed from the public. They were created as a haven for institutional investors seeking to trade large blocks of shares in secret, hoping to minimize their impact on prices so they can get a better deal on their trades.

French Probe

Authorities in France are also investigating allegations the bank helped clients evade taxes. A French court last week demanded a security deposit of 1.1 billion euros to cover a possible fine for laundering the proceeds of tax evasion in the country. UBS has appealed the demand.

Before the demand for the security guarantee was made, the bank was in “advanced discussions” with French authorities about a “double-digit million settlement,” Ermotti told Bloomberg Television. “So you can see why paying 1.1 billion euros makes no sense,” he said.

UBS is also among banks in negotiations with the Financial Conduct Authority in the U.K. to reach the first settlement in a probe of alleged manipulation of the currency markets, people with knowledge of the situation said last week. The FCA may levy fines in coming months, three of the people said.

The bank may face fines of $6 billion to $9 billion from the U.S. and European Union regulators investigating foreign exchange rigging, Stefan Stalmann, an analyst at Autonomous Research LLP, said in a June report.