April 30, 2013 9:17 am

UBS move to curb investment banking risk bolsters Q1 profits

Strong first-quarter results for UBS have propelled its investment bank to the top of the rankings of its peers for profitability, countering concerns over the impact of its radical restructuring plans.

Switzerland’s largest bank by assets has faced questions about the future profitability of its investment bank since it unveiled last October a plan to wind down risky and capital­-intensive parts of the business and focus its activities around its wealth management.

At the time, some analysts questioned whether the move would leave UBS’s investment bank unable to compete with bigger rivals.

However, in the first three months of the year, the division’s pre-tax profit came in at SFr977m, almost twice the SFr509m it managed a year earlier, while its post-tax return on equity, estimated at 37 per cent by analysts at Morgan Stanley, left UBS’s investment bank as the most profitable among its main European and US rivals.

Deutsche Bank on Tuesday reported a 25 per cent return on equity in its corporate banking and securities unit, while Credit Suisse achieved a 23 per cent return on equity in its investment bank. All three were ahead of their main US rivals.

“It seems like UBS has the last laugh in investment banking,” one analyst said.

However, Huw van Steenis, analyst at Morgan Stanley, said that if UBS’s losses in the non-core unit holding its legacy trading assets were included in the equation, the return on equity would fall to 13 per cent in the first quarter, while Kinner Lakhani, an analyst at Citi, said that UBS’s more focused investment bank might suffer more than others in times of greater volatility.

“Seasonality will feature at the investment bank, like ­others. With a less diversified offering and gearing to equities and deal making, investor and management confidence matters more,” he said.

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Overall, in the three months to the end of March, UBS posted net profits of SFr988m ($1.05bn) – 4.5 per cent lower than the SFr1.04bn the bank managed a year earlier, but well ahead of the SFr601m analysts had forecast in a Reuters poll.

Chief executive Sergio Ermotti said the results – which also saw revenues rise from SFr6.5bn to SFr7.8bn – were an encouraging start to UBS’s new strategy. “While it is too early to declare victory, we have shown our business model works in practice. Although markets improved, we still saw challenges, so I am very pleased with our performance,” he said, though he added that continuing uncertainty in Europe could slow second quarter activity.

As with its investment bank, UBS’s private banking activities fared well. The non-Americas wealth management division brought in SFr15bn in net new money, its highest quarterly inflows since before the financial crisis, while the Americas wealth management division attracted SFr9.2bn. Both divisions were also profitable, with the Americas business posting pre-tax profits of SFr251m, while the non-Americas business reported profits of SFr664m.

Shares in UBS closed up 5.67 per cent at SFr16.60.

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