UBS AG (UBS) reported second-quarter 2013 net income attributable to shareholders of CHF 690 million ($731.8 million), which substantially lagged the prior-quarter’s income of CHF 988 million ($1,062.3 million). The quarterly results were primarily impacted by higher net charges for provisions for litigation and regulatory matters along with an impairment of financial assets worth CHF 865 million ($917.4 million).
UBS AG’s adjusted pre-tax income came in at CHF 1.0 billion ($1.1 billion) in the reported quarter compared with CHF 1.9 billion ($2.0 billion) in the prior quarter.
The company experienced lower net interest and trading revenues but elevated net fee and commission income. Further, increased operating expenses acted as a headwind for the quarter.
Notably, the company experienced own credit gain on financial liabilities of CHF 138 million ($146.4 million) as against a loss of CHF 181 million ($194.6 million) in the prior quarter and net restructuring charges of CHF 140 million ($148.5 million) in the reported quarter versus CHF 246 million ($264.5 million) in the prior quarter.
Performance in Detail
UBS AG’s operating income declined 5% from the prior quarter to CHF 7.4 billion ($7.8 billion) while operating expenses surged 1% sequentially to CHF 6.4 billion ($6.8 billion).
On a sequential basis, operating profit before tax increased 4% at its Wealth Management Americas division, 9% at Retail & Corporate and 11% at Corporate Center. However, operating profit moved down 16% at Wealth Management division, 27% for Global Asset Management and 21% for Investment Bank.
Moreover, at UBS AG’s Investment Bank unit, the company experienced a pre-tax profit of around CHF 775 million ($822 million) compared with CHF 977 million ($1,050.5 million) in the prior quarter.
UBS AG's invested assets were CHF 2,348 billion ($2,483 billion) as of Jun 30, 2013, down from CHF 2,373 billion ($2,498 billion) as of Mar 31, 2013.
The company witnessed a rise in its regulatory capital. The BIS Basel III framework came into effect in Switzerland on Jan 1, 2013. The company’s phase-in BIS Basel III common equity tier 1 ratio stood at 16.2% as of Jun 30, 2013, compared with 15.3% in the prior quarter.
Further, phase-in BIS Basel III common equity tier 1 capital decreased slightly by CHF 0.8 billion to CHF 39.4 billion ($41.7 billion) as of Jun 30, 2013. Phase-in Basel III risk -weighted assets declined CHF 19.8 billion to CHF 242.6 billion ($256.6 billion).
On a fully applied basis, UBS AG’s BIS Basel III common equity tier 1 ratio increased 110 basis points to 11.2% and fully applied risk-weighted assets declined to CHF 239.2 billion ($253 billion) from CHF 258.7 billion ($272 billion) in the prior quarter. As of Jun 30, 2013, total assets stood at CHF 1,129 billion ($1,194 billion), dropping CHF 85 billion from Mar 31, 2013.
Notably, prior to the earnings release, UBS AG announced the settlement of a lawsuit filed by the Federal Housing Finance Agency (FHFA), which had accused the former of misrepresenting mortgage-backed securities (MBS). The Swiss banking major shelled out roughly $885 million for the settlement.
Outlook
According to UBS AG, failure to attain persistent progress on material improvements amid the ongoing Eurozone sovereign debt concerns, the European banking system and the ongoing global concerns, as well as the uncertainty at large, could impact the client activity levels in the third quarter of 2013. However, it expects wealth management businesses to continue to attract net new money.
In Conclusion
In the stressed operating environment, UBS AG recorded a sequential decline in its earnings owing to legal issues. The recent lawsuit settlement by the company manifests its aim to resolve all mortgage related issues, and thereby reduce costs over the upcoming period. Further, the move is expected to provide relief to the investors who were duped by such risky investments.
Amid the overall economic volatility and the Eurozone debt crisis, UBS AG will focus on building its capital level. Restructuring initiatives taken during 2012 are encouraging and we believe that such efforts would help improve the company’s operating competence in the future. Moreover, prudent business model changes can further improve its efficiency and bolster its competitive edge.
UBS AG currently carries a Zacks Rank #4 (Sell). Some foreign banks that are worth considering include BBVA Banco Franc (BFR), Mitsubishi UFJ Financial Group, Inc. (MTU) and Sumitomo Mitsui Financial Group Inc. (SMFG), all carrying a Zacks Rank #1 (Strong Buy).
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