UBS AG Returns to Earnings

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UBS AG (UBS) reported first-quarter 2013 net income attributable to shareholders of CHF 988 million ($1,062.3 million), which substantially outpaced the prior-quarter’s loss of CHF 1.9 billion ($2.0 billion). The positive quarterly results were primarily impacted by lower net charges for provisions for litigation and regulatory matters as well as reduced own credit loss.

UBS AG’s adjusted pre-tax income came in at CHF 1.9 billion ($2.0 billion) in the reported quarter compared with a loss before tax of CHF 1.2 billion ($1.3 billion) in the prior quarter.

The company experienced higher net interest and trading revenues along with elevated net fee and commission income. Further, decreased operating expenses acted as a tailwind for the quarter.

Notably, the company experienced own credit loss on financial liabilities of CHF 181 million ($194.6 million) as against a loss of CHF 414 million ($444.5 million) in the prior quarter and restructuring charges of CHF 246 million ($264.5 million) in the reported quarter versus CHF 258 million ($277.0 million) in the prior quarter.

Performance in Detail

UBS AG’s operating income surged 25% from the prior quarter to CHF 7.8 billion ($8.4 billion) while operating expenses dipped 21% sequentially to CHF 6.3 billion ($6.8 billion).

On a sequential basis, operating profit before tax increased 67% at its Wealth Management division, 28% for Global Asset Management and 17% at Wealth Management Americas. However, operating profit at Retail & Corporate moved down 4%.

Moreover, at UBS AG’s Investment Bank unit, the company experienced a pre-tax profit of around CHF 977 million ($1,050.5 million) compared with a loss of CHF 243 million ($260.9 million) in the prior quarter.

UBS AG's invested assets were CHF 2,373 billion ($2,498 billion) as of Mar 31, 2013, up from CHF 2,230 billion ($2,440 billion) as of Dec 31, 2012.

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 15.3% as of Mar 31, 2013, stable compared with the prior quarter.

Further, phase-in BIS Basel III common equity tier 1 capital increased slightly by CHF 0.2 billion to CHF 40.2 billion ($42.3 billion) as of Mar 31, 2013. Phase-in Basel III risk -weighted assets surged from CHF 0.7 billion to CHF 262.5 billion ($276 billion).

On a fully applied basis, UBS AG’s BIS Basel III common equity tier 1 ratio increased 30 basis points to 10.1% and fully applied risk-weighted assets were CHF 258.7 billion ($272 billion). As of Mar 31, 2013, balance sheet assets stood at CHF 1,214 billion ($1,278 billion), dropping CHF 46 billion from Dec 31, 2012.

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 second quarter of 2013. However, it expects wealth management businesses to continue to attract net new money.

In Conclusion

Despite the stressed operating environment, UBS AG recorded significant improvement in its earnings. Moreover, prudent business model changes can further improve its efficiency and bolster its competitive edge.

Amid the overall economic volatility and the Eurozone debt crisis, the company 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.

UBS AG currently carries a Zacks Rank #3 (Hold). Other foreign banks that are worth considering include National Bank of Canada (NTIOF), The Toronto-Dominion Bank (TD) and Deutsche Bank AG (DB), all carrying a Zacks Rank #2 (Buy).

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