UBS AG (UBS) reported third-quarter 2014 net income attributable to shareholders of CHF 762 million ($834.2 million), which compared favorably with the prior-year quarter earnings of CHF 577 million ($619.1 million). The results were driven by elevated net interest income (up 21% year over year) and increased net fee and commission income (up 12% year over year).
UBS AG’s reported pre-tax loss came in at CHF 554 million ($606.5 million) in the reported quarter as compared with profit of CHF 356 million ($382 million) in the prior-year quarter. Results included net tax benefit related to annual revaluation of deferred tax assets worth CHF 1.3 billion ($1.4 billion).
Further, net charges for provisions for litigation, regulatory and similar matters of CHF 1.8 billion ($1.97 billion) were recorded, significantly up from the prior-year quarter.
Performance in Detail
UBS AG’s operating income increased 9.5% from the prior-year quarter to CHF 6.9 billion ($7.6 billion), while operating expenses jumped 25.4% year over year to CHF 7.4 billion ($8.1 billion). The rise was mainly due to elevated general and administrative expenses.
On a year-over-year basis, adjusted operating profit before tax increased 24.3%, 15.3%, 7% and 16.2% at its Wealth Management division, Wealth Management Americas division, Retail & Corporate division and Global Asset Management unit, respectively. Further, Corporate Center reported a loss.
Moreover, UBS AG’s Investment Bank unit experienced an adjusted pre-tax loss of around CHF 1.2 billion ($1.3 billion) compared with a profit of CHF 335 million ($359.4 million) in the prior-year quarter.
Notably, UBS AG experienced own credit gain on financial liabilities of CHF 61 million ($66.8 million) as against loss of CHF 147 million ($157.7 million) in the prior-year quarter. Further, the company recorded net restructuring charges of CHF 176 million ($192.7 million) in the reported quarter, down 6.4% year over year.
Capital Position
As of Sep 30, 2014, UBS AG's invested assets were CHF 2,604 billion ($2,737 billion), up CHF 301 billion year over year. Total assets stood at CHF 1.05 trillion ($1.1 trillion), up CHF 0.2 billion from Sep 30, 2013.
UBS AG’s phase-in BIS Basel III common equity tier (CET) 1 ratio stood at 19.1% as of Sep 30, 2014, compared with 17.5% in the prior-year quarter. Further, phase-in BIS Basel III CET 1 capital increased CHF 3.5 billion to CHF 42.5 billion ($44.7 billion) as of Sep 30, 2014.
Phase-in Basel III risk-weighted assets (RWA) increased CHF 0.3 billion year over year to CHF 222.6 billion ($234 billion). Fully applied RWA climbed CHF 0.4 billion year over year to CHF 219.3 billion ($230.5 billion).
On a fully applied basis, UBS AG’s BIS Basel III common equity tier 1 ratio increased 180 basis points (bps) year over year to 13.7%. Swiss systemically relevant banks (SRB) leverage ratio stood at 5.4%, up 120 bps year over year.
Outlook
According to UBS AG, absence of persistent progress on material improvements regarding unresolved issues in Europe, U.S. fiscal and monetary issues and the ongoing global concerns, as well as the uncertainty at large and fear of risks associated with the Ebola virus, could delay development in market conditions. However, with the execution of its strategies, the company expects to generate sustainable returns for shareholders.
Operating Expenses Guidance
To achieve CHF 2.1 billion net cost reduction target, UBS AG has updated guidance of restructuring costs for 2014 and 2015, and initiated that for 2016 and 2017. The company projects restructuring costs of about CHF 700 million for 2014 and CHF 1.4 billion for 2015. Further, for 2016, restructuring costs are estimated at CHF 900 million and for 2017 it is pegged at CHF 400 million. Additionally, UBS AG expects to incur about CHF 100 million per year from 2015 to 2017 in order to meet planned cost reductions.
Moreover, charges related to litigation, regulatory and similar matters are expected to remain at elevated levels through 2014.
In Conclusion
Amid the overall economic volatility, UBS AG will focus on building its capital levels. Restructuring initiatives including cost control are encouraging. However, given the stressed operating environment, we believe any significant improvement in earnings would remain elusive in the upcoming quarters.
UBS AG currently carries a Zacks Rank #5 (Strong Sell).
Other foreign banks that are expected to release results in the coming days include Itau Unibanco Holding S.A. (ITUB), Royal Bank of Canada (RY) and HSBC Holdings plc (HSBC). HSBC will report third-quarter 2014 results on Nov 3 and Itau Unibanco on Nov 4, while Royal Bank of Canada is scheduled to report its fourth-quarter fiscal 2014 (ended Sep 30) results on Dec 3.
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