UBS AG (UBS) Posts Impressive Q2 Earnings on Lower Expenses

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UBS AG (UBS) reported second-quarter 2014 net income attributable to shareholders of CHF 792 million ($890.8 million), which compared favorably with the prior-year quarter earnings of CHF 690 million ($731.8 million). The results were driven by prudent expense management.

Further, the company experienced own credit gain on financial liabilities and increased net fee and commission income. However, reduced net interest and trading revenues (down 13% year over year) was recorded.

The reported quarter recorded reduced net charges for provisions for litigation, regulatory and similar matters of CHF 254 million ($285.7 million), down 61% year over year.

UBS AG’s adjusted pre-tax income came in at CHF 1.2 billion ($1.3 billion) in the reported quarter, up 20% year over year.

Performance in Detail

UBS AG’s operating income decreased 4.1% from the prior-year quarter to CHF 7.1 billion ($8.0 billion), while operating expenses decreased 7.8% year over year to CHF 5.9 billion ($6.6 billion). The reduction was mainly due to lower general and administrative expenses.

On a year-over-year basis, adjusted operating profit before tax decreased 35.3%, 9.9%, 5.9% and 29.6% 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 profit of around CHF 563 million ($633.2 million), down 30% year over year.

Notably, UBS AG experienced own credit gain on financial liabilities of CHF 72 million ($81.0 million) as against CHF 138 million ($146.4 million) in the prior-year quarter. Further, the company recorded net restructuring charges of CHF 89 million ($100 million) in the reported quarter, down 36.4% year over year.

Capital Position

As of Jun 30, 2014, UBS AG's invested assets were CHF 2,507 billion ($2,811.8 billion), up CHF 159 billion year over year. Total assets stood at CHF 982.6 billion ($1.1 trillion), down CHF 146.5 billion from Jun 30, 2013.

UBS AG’s phase-in BIS Basel III common equity tier (CET) 1 ratio stood at 18.2% as of Jun 30, 2014, compared with 16.2% in the prior-year quarter. Further, phase-in BIS Basel III CET 1 capital increased CHF 2.5 billion to CHF 41.9 billion ($47 billion) as of Jun 30, 2014.

Phase-in Basel III risk-weighted assets (:RWA) declined CHF 12.7 billion year over year to CHF 229.9 billion ($257.9 billion). Fully applied RWA declined to CHF 226.7 billion ($254.3 billion) from CHF 239.2 billion ($253 billion) as of Jun 30, 2013.

On a fully applied basis, UBS AG’s BIS Basel III common equity tier 1 ratio increased 230 basis points (bps) year over year to 13.5%. Swiss systemically relevant banks (SRB.V) leverage ratio stood at 5.3%, up 140 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 seasonality, could impact the client activity levels and trading volumes. However, with the execution of its strategies, the company expects to generate sustainable returns for shareholders.

German Cross-border Tax Matter with Bochum Authorities Resolved

UBS AG resolved its cross-border tax matter in Germany with the authorities in Bochum in July with the settlement of about €300 million, concluding the Bochum proceedings. Notably, UBS AG’s second-quarter 2014 results included provisions of about CHF 120 million relating to this matter.

In Conclusion

Amid the overall economic volatility, UBS AG will focus on building its capital level. 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 #3 (Hold).

Competitive Landscape

The Royal Bank of Scotland Group plc’s (RBS) first-half 2014 profit from continuing operations came in at £1.92 billion ($3.20 billion), rising more than twofold from £696 million ($1,074.9 million) in the prior-year comparable period. Results were driven by lower loan impairment losses and reduced operating expenses. Additionally, the results reflected higher net interest income. However, reduced non-interest income declined.

HDFC Bank Ltd.’s (HDB) first-quarter fiscal 2015 (ended Jun 30) results recorded a net profit of INR22.33 billion ($0.37 billion), up 21.1% year over year. The results benefited from a rise in net interest income. Moreover, deposit and loan balances continued to show improvement. However, higher operating expenses and fall in non-interest revenues were the causes of concerns. Again, credit quality was a mixed bag.

Among other foreign banks, ICICI Bank Ltd. (IBN) is expected to release the results for the June-end quarter on Jul 30.

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