UBS Profit Dips, Outlook Bleak

Zacks Investment Research
updated | Zacks.com

UBS AG (NYSE:UBS) has posted a sequential as well as a year-over-year drop in profit in the fourth quarter of 2011. The company’s outlook also remains subdued in light of the eurozone sovereign debt crisis, the European banking system and US federal budget deficit issues, besides uncertainty regarding the global economy.

The company reported fourth quarter net profit attributable to shareholders of CHF 393 million ($428 million) or CHF 0.10 per share, down from CHF 1.0 billion or CHF 0.27 per share in the prior quarter and CHF 1.7 billion or CHF 0.43 per share in the prior-year quarter.

For full year 2011, UBS AG reported net profit attributable to shareholders of CHF 4.2 billion ($4.6 billion) or CHF 1.10 per share, down from CHF 7.5 billion or CHF 1.96 per share in the prior year.

UBS AG is focused on managing its expenses well and increase its operating efficiency. The company continued to progress on delivering its previously announced cost reduction program, with headcount being down by 1,101 from the prior quarter.

Total operating expenses for 2011 decreased by CHF 2.1 billion from the prior year to CHF 22.4 billion. Further benefits of such measures are expected to be realized in 2012. As opportunities for further tactical cost-cutting measures are limited, the company’s future focus would be on alterations to the company’s organizational design and structures.

UBS AG reaffirmed its plan to propose a dividend of CHF 0.10 per share for the financial year 2011 and subsequently implement a progressive capital return program.

Quarter in Detail

Revenues at UBS AG came in at CHF 6.0 billion, down 7% sequentially. The decrease primarily reflected a fall in revenue in Wealth Management & Swiss Bank segment, partially offset by a rise in revenue in Investment Bank, Wealth Management Americas and Global Asset Management segment.

However, operating expenses declined 1% from the prior quarter to CHF 5.4 billion, primarily due to lower salaries and variable compensation resulting from reduced expenses for variable compensation and lower restructuring charges.

UBS AG reported inflows of CHF 6.4 billion, up from CHF 4.9 billion but down from CHF 7.1 billion in the prior-year quarter. The company’s invested assets were CHF 2,167 billion as of December 31, 2011, up from CHF 2,025 billion as of September 30, 2011, as a result of the positive market performance, as well as the appreciation of the US dollar against the Swiss franc.

UBS AG experienced an increase in regulatory capital. Its Basel II tier 1 capital ratio improved to 19.7% at the end of the fourth quarter from 18.4% at the end of the third quarter. The company’s capital disclosures fall under the revised Basel II market risk framework referred to as Basel 2.5 from December 31, 2011. Its Basel 2.5 tier 1 capital ratio improved to 16.0% from 13.2% on September 30, 2011. Balance sheet assets stood at CHF 1,419 billion, CHF 28 billion lower than on September 30, 2011, as a result of lower positive replacement values.

Outlook

Outlook seems grim with UBS AG predicting no material improvement in market conditions in the first quarter of 2012. In fact, the company anticipates headwinds for revenue growth, net interest margins and net new money. This is principally due to the ongoing eurozone sovereign debt concerns, the European banking system and US federal budget deficit issues, and uncertainty at large.

Such issues are likely to adversely impact the client activity levels in the first quarter of 2012. This is projected to impact the company’s overall results and the performance of the Investment Bank division mainly. Yet, the company expects it asset-gathering businesses to continue to attract net new money. The company will also remain committed to strengthening its capital position and lowering its Basel III risk-weighted assets.

Competitors

Similar to UBS AG, Deutsche Bank AG (NYSE:DB) reported a drop in income in the fourth quarter of 2011. Results reflected the continued market uncertainty and the Europe’s sovereign debt crisis. Following UBS AG, the other European banks, Credit Suisse Group (NYSE:CS) and Barclays Group Plc. (NYSE:BCS) are scheduled to report this Thursday and Friday, respectively.

Our Take

We believe that the volatile capital market conditions will restrict top-line growth at UBS AG. However, in the midst of the overall economic volatility and eurozone debt crisis, the company will focus on building up its capital level. Restructuring initiatives are encouraging and we believe that such efforts would help improve its operating efficiency in the years ahead.

 
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