UBS AG (UBS) posted a sequential rise in profit in the first quarter of 2011. The bright spot was the surge in positive inflows that the company experienced in the quarter. The company reported first quarter 2011 net profit attributable to shareholders of CHF 1.8 billion ($2.05 billion) or CHF 0.47 per share, up from CHF 1.7 billion or CHF 0.43 per share in the prior quarter. However, results were down from the prior-year quarter when the company reported net profit of CHF 2.2 billion or CHF 0.58 per share.
UBS AG’s operating income increased 17% sequentially to CHF 8.3 billion. The increase was attributed to higher trading income, predominantly in credit and equities businesses within Investment Bank. This was partially offset by lower fees and commissions as well as weaker other income. The other income category included a significant gain from a property disposal in the previous quarter.
Sequentially, UBS AG experienced an increase in pre-tax profit in most of its segments including Investment Bank, Wealth Management, Retail & Corporate, Wealth Management & Swiss Bank, and Wealth Management Americas. However, pre-tax profit in Global Asset Management was lower than the prior quarter figure.
However, operating expenses advanced 3% from the prior quarter to CHF 6.1 billion. Higher personnel expenses were primarily responsible for that increase. Additionally, the company experienced a net tax charge in the quarter compared with a net tax credit in the prior quarter. The increase was partly compensated by lower general and administrative expenses, primarily due to lower charges for litigation provisions.
We are encouraged to see the increase in positive flows that UBS AG reported in the quarter. The company reported inflows of CHF 22.3 billion, compared with CHF 7.1 billion in the prior quarter and outflows of CHF 18.0 billion in the prior-year quarter. Inflows were seenacross all asset gathering businesses.
UBS AG’s invested assets were CHF 2,198 billion as of March 31, 2011, up 2% from CHF 2,152 billion as of December 31, 2010 as positive market movements and net new money inflows more than offset the depreciation of the U.S. dollar against the Swiss franc.
UBS AG experienced an increase in regulatory capital that more than compensated for an increase in risk-weighted assets. The company’s BIS tier 1 capital ratioinched up to 17.9% as of March 31, 2011, from 17.8% at the end of the prior quarter, while core tier 1 capital ratio increased to 15.6% from 15.3% over the same period. Risk-weighted assets increased to CHF 203.4 billion from CHF 198.9 billion.
Outlook
UBS AG is optimistic that trading volumes in the equity markets will be around the first quarter level, which in turn would support wealth management businesses’ transaction-based income and Investment Bank’s flow trading revenue. Volatility in the currency market is expected to continue with European sovereign debt and developments in the Middle East and Japan being the other concerns.
The company also anticipates short-term interest rates in the West, particularly in Switzerland, to remain low. This would restrict interest margins further, particularly in its wealth management businesses and in Swiss retail and corporate banking operations. Expenses are projected to be under pressure from an increase in base salary and competition in the hiring market in certain regions.
Competitors
Following UBS AG, the other European banks that are scheduled to report this week include Credit Suisse Group(CS) (April 27) and Deutsche Bank AG (DB) (April 28).
Our Take
The global economic turmoil had a severe impact on the Swiss banking major’s balance sheet when the subprime crisis led to record losses. Additionally, the issues emanating from alleged tax evasion investigation and the dilution of Swiss banking secrecy significantly impacted UBS AG’sperformance in the past several quarters, as worried clients looked for a safer refuge. Ultimately, the company agreed to transfer details of thousands of clients to the U.S. authorities.
Increasing profitability and inflows remain UBS AG’s priorities. The company has taken several restructuring initiatives, which should support its results in the upcoming quarters. Inflows have increased, which augurs well for the company.
Yet, we believe the volatile capital market conditions will restrict the top-line growth to some extent in the near term. Also, the pressure on expenses following the salary hike would limit bottom-line improvement. UBS AG has been subject to stricter global banking rules following the financial crisis and the government bailout. To control risk, a trimming of its fixed-income business is also anticipated.
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
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