UBS Group AG (UBS) reported fourth-quarter 2014 net profit attributable to shareholders of CHF 963 million ($998.3 million), increasing 5% year over year. The results were driven by elevated net interest income (up 21% year over year) and increased net fee and commission income (up 7% year over year).
Following the earnings release, investors have been bearish on the results as GRSs of UBS Group AG fell 4.5% in the premarket trading session. The price reaction perhaps has resulted from the company’s challenging outlook for the near term which encompasses several factors including a likely impact on future profitably by the appreciation of the Swiss Franc and higher legal costs. However, the price reaction during the full trading session will give a better idea.
Notably, UBS Group AG experienced own credit gain on financial liabilities of CHF 70 million ($72.6 million) as against loss of CHF 94 million ($97.4 million) in the prior-year quarter. Further, the company recorded net restructuring charges of CHF 208 million ($215.6 million) in the reported quarter, up 6.4% year over year. These were included in the company’s results. Further, net charges for provisions for litigation, regulatory and similar matters of CHF 176 million ($182.5 million) were recorded, significantly up from the prior-year quarter.
For full year 2014, the company reported net profit attributable to shareholders of CHF 3.57 billion ($3.90 billion), up from CHF 3.17 billion ($3.42 billion).
During 2014, management established UBS Group AG, which stands as the holding company of UBS Group. The move came in line with several measures to significantly improve the resolvability of UBS Group in response to heightened issues surrounding “too-big-to-fail” regulatory requirements.
On 10 Jun 2014, UBS Group AG was incorporated as a wholly owned subsidiary of UBS AG. On Sep 29, 2014, UBS Group AG introduced an offer of acquiring all the issued ordinary shares of UBS AG in exchange for registered shares of UBS Group AG on a one-for-one basis. Following completion of the share exchange offer, UBS Group AG held 96.68% of UBS AG shares by Dec 31, 2014.
UBS Group AG proposes to acquire the remaining shares of UBS AG shares through a squeeze-out procedure. The company fully accrued a one-time supplementary capital return of CHF 0.25 per share in the fourth quarter of 2014, which it intends to pay following the successful completion of the squeeze-out procedure.
Given the company’s gradual progress towards several initiatives including reducing risk-weighted assets (RWA), improving leverage ratio and deriving increased net profit, UBS Group AG plans to propose an ordinary dividend of CHF 0.50 per share for 2014, reflecting a 100% year-over-year increase and a payout ratio of 53% of the Group’s net profit.
Performance in Detail
UBS Group AG’s adjusted operating income increased 4% from the prior-year quarter to CHF 6.66 billion ($6.9 billion). For full-year 2014, the company’s operating income declined slightly from the prior year to CHF $27.67 billion ($30.3 million).
Adjusted operating expenses were up 6% year over year to CHF 6 billion ($6.2 billion). The rise reflected elevated general and administrative expenses.
UBS Group AG’s pre-tax operating profit came in at CHF 538 million ($557.7 million) in the fourth quarter, up 20% year over year.
Wealth Management division generated adjusted operating profit before tax of CHF 694 million ($719.5 million) in the quarter, up 36% year over year. Notably, the quarter marked the ‘strongest quarter’ for this division since 2008.
Retail & Corporate division’s adjusted operating profit before tax was CHF $356 million ($369.1million), up 4% year over year. Also, Investment Bank unit’s adjusted operating profit before tax came in at CHF $426 million ($441.6 million) in the quarter, up 10% year over year.
However, Wealth Management Americas division’s adjusted operating profit before tax came in at CHF 227 million ($235.3 million), down 11% from the prior-year quarter. Also, the Global Asset Management unit’s adjusted operating profit before tax declined 13% year over year to CHF $124 million ($128.5 million) in the quarter. Notably, Corporate Center reported a loss in the quarter.
Capital Position
As of Dec 31, 2014, UBS AG's invested assets were CHF 2,734 billion ($2,763 billion), up 14% year over year. Total assets stood at CHF 1.06 trillion ($1.07 trillion), increasing 5% year over year.
UBS AG’s phase-in BIS Basel III common equity tier (CET) 1 ratio stood at 19.5% as of Dec 31, 2014, compared with 18.5% in the prior-year quarter. Further, phase-in BIS Basel III CET 1 capital decreased 2% year over year to CHF 43.0 billion ($44.7 billion) as of Dec 31, 2014.
Phase-in Basel III RWA decreased 3% year over year to CHF 220.9 billion ($241.6 billion). Fully applied RWA declined 4% year over year to CHF 216.5 billion ($236.8 billion).
On a fully applied basis, UBS AG’s BIS Basel III common equity tier 1 ratio increased 60 basis points (bps) year over year to 13.4%. Swiss systemically relevant banks (SRB) leverage ratio stood at 5.4%, up 70 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 about the possible impacts of lower and volatile energy and other commodity prices, could delay development in market conditions.
Further, the company’s other concerns include removal of the EUR/CHF floor by Swiss National Bank. The company warned about the increased value of the Swiss franc in terms with other currencies, particularly US dollar and the euro. Also negative interest rates in the eurozone and Switzerland are likely to put pressure on company’s profitability and if they continues it might impact the company’s targets set for performance.
However, amid a challenging operating environment the company remains committed with the execution of its strategies and expects to generate sustainable returns for shareholders.
Guidance
For the Group, management aims to achieve adjusted return on tangible equity of around 10% in 2015 and more than 15% from 2016. Additionally, cost to income ratio is projected in the range of 60–70%
For 2015 and upcoming years, Basel III fully applied CET1 ratio target is set at 13% and 10% post-stress. Basel III RWA is projected to reduce CHF 215 billion by Dec 31, 2015 and reduce CHF 200 billion by Dec 31, 2017. UBS Group AG expects Swiss SRB leverage ratio denominator of CHF 900 billion by 2016.
In Conclusion
Amid the overall economic volatility, UBS Group AG will focus on building its capital levels. Restructuring initiatives including cost control are encouraging. Further, the company’s intention to pay one-time supplementary capital return and raise the ordinary dividend by twofold certainly bring cheers to investors.
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 #3 (Hold).
Performance of Other Foreign Banks
Deutsche Bank AG (DB) reported net income of €441 million ($551 million) in the fourth quarter of 2014, compared with loss of €1.37 billion ($1.86 billion) in the prior-year quarter. Notably, in the reported quarter, the bank recorded income tax benefit of €189 million ($236 million), primarily due to changes in the recognition and measurement of deferred taxes.
Mitsubishi UFJ Financial Group Inc. (MTU) reported net income of ¥926.9 billion ($8.71 billion) for nine months (ended Dec 31) of fiscal year ended Mar 31, 2015, up from net income of ¥785.4 billion ($7.93 billion) in the year-ago period. For the period under review, rise in net interest income and fee revenues were the tailwinds. Further, increased gross profits along with strong loan and deposit growth were the positives.
However, increase in G&A expenses negatively impacted the results.
Among other foreign banks – The Royal Bank of Scotland Group plc (RBS) is scheduled to report December quarter-end results on Feb 26.
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