UBS Profit Beats Estimates on Investment Bank Rebound

UBS AG, Switzerland’s biggest bank, reported a third consecutive quarterly profit, beating analysts’ estimates on higher-than-expected trading revenue.

UBS gained the most in 11 weeks in Zurich trading after reporting net income of 2.01 billion Swiss francs ($1.91 billion), following a net loss of 1.4 billion francs a year earlier. That beat the 1.12 billion-franc median estimate of 11 analysts surveyed by Bloomberg News.

UBS’s investment bank reported a smaller decline in trading revenue than the average of its competitors from the first quarter as the European sovereign debt crisis made clients reluctant to trade. Chief Executive Officer Oswald Gruebel said he’s “confident” about the future after withdrawals from UBS’s wealth management units slowed.

“These results imply that UBS has, contrary to our thesis, managed to turn around the investment bank,” said Dirk Hoffmann-Becking, a London-based analyst at Sanford C. Bernstein, who has an “underperform” rating on UBS. “The performance appears materially more robust than its peers.”

UBS rose as much as 9.9 percent, the biggest intraday gain since May 10, and traded 9.8 percent higher at 17.24 francs as of 11:52 a.m. in Zurich. That made the stock the best performer on the 54-company Bloomberg Europe Banks and Financial Services Index, which advanced 3.6 percent.

Pretax profit at the investment bank rebounded to 1.31 billion francs after a 1.85 billion-franc loss a year ago, beating estimates for earnings of 759 million francs.

‘Right Strategy’

The unit generated 3.07 billion francs from trading stocks, currencies, bonds and commodities in the second quarter. The 10 percent decline from the first three months of the year compares with the average 34 percent drop reported by Zurich-based Credit Suisse Group AG, Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley of New York, as well as Charlotte, North Carolina-based Bank of America Corp.

“Our portfolio of businesses is increasingly able to generate competitive returns in a variety of market conditions, and our risk management framework has proven robust,” Gruebel said in the statement. “I remain confident in our future and I firmly believe that we have the right strategy in place.”

The bank still has “a lot of catching up to do” in equities trading after its market share was eroded in the credit crisis, Gruebel told analysts and reporters in Zurich. In fixed- income trading, a bank the size of UBS should be posting quarterly revenue of 4 billion francs, he said.

Withdrawals Slow

Withdrawals from UBS’s wealth management units slowed to 8.1 billion francs in the second quarter from 15.4 billion francs in the first. Rich clients pulled a net 243.5 billion francs in the two years through March following UBS’s credit- crisis losses, pressure on Swiss banking secrecy and departing client advisers.

The wealth management and Swiss bank division reported a 21 percent increase in pretax profit to 1.13 billion francs, beating analysts’ estimates for 1.08 billion francs, while wealth management Americas had a pretax loss of 67 million francs on restructuring charges of 146 million francs.

UBS is “about to see the turning point” in client-fund flows in the Americas, Chief Financial Officer John Cryan told journalists on a conference call. Outflows from the wealth management and Swiss bank division related mainly to cross- border assets booked in Switzerland, he said.

Stress Tests

UBS and its largest Swiss rival, Credit Suisse, passed stress tests that included a global recession, a slump in financial markets and “very sharp shocks” in some European states, the country’s financial regulator said July 23. The banks maintained tier 1 capital ratios in excess of 8 percent in the face of “particularly severe” scenarios, the regulator said.

Credit Suisse last week beat analysts’ expectations with a second-quarter profit of 1.59 billion francs thanks to a tax credit and gains on the company’s own debt. The bank attracted 13.8 billion francs in net new funds at its wealth management business, while the securities unit reported a 53 percent drop in pretax profit as Europe’s sovereign debt crisis deterred clients from trading.

The crisis is creating “more headwinds” for UBS’s bid to reverse withdrawals this year as clients are uncertain about what to do with their money, Juerg Zeltner, head of wealth management, said in an interview this month.

“We’re still hopeful that we can turn the situation around by the end of the year,” Cryan said today. “But it’s not entirely in our control.”

Hiring ‘Good People’

The bank is “relieved” the U.S. cross-border case, in which UBS was accused of helping clients evade taxes, is drawing to a close, Zeltner said, adding that this will help the company hire more client advisers after 1,149 departures in 2009.

UBS aims to start making progress over the next six months toward its target of having a total of 4,700 advisers, he said. The number fell by 26 to 4,112 during the second quarter.

The price of hiring “good people” is rising around the world, Gruebel said. The bank doesn’t see “a squeeze” in Asia as a result of competitors trying to expand there, he said.

The gross margin at the wealth management and Swiss bank division, or the amount of revenue the bank earns on assets under management, increased to 95 basis points in the second quarter from 93 basis points in the previous three months. A basis point is one hundredth of a percentage point. UBS reiterated its goal of boosting margins to more than 100 basis points over the next three to five years.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

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