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UBS Attracts Highest Wealth Management Inflows Since 2007

UBS AG (UBSN), Switzerland’s largest bank, attracted the most new money from wealthy customers since the end of 2007 and reported first-quarter profit that beat analysts’ estimates.

UBS rose 3.9 percent in Swiss trading, the biggest gain in two months, after wealth management and retail clients added a net 16.7 billion francs ($19 billion), more than double the estimate of analysts surveyed by Bloomberg. Net income was 1.81 billion francs, topping the 1.69 billion-franc forecast of analysts.

Chief Executive Officer Oswald Gruebel attributed the increase in new funds to “the return of client trust and confidence” after wealthy customers withdrew 251.6 billion francs in the nine quarters through June of last year. Earnings at the investment bank slumped on lower revenue from trading stocks and bonds.

“The main thing is they’re having inflows again, and that’s good,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “The investment bank will remain a construction site for UBS for a while.”

UBS rose 64 centimes to 17.23 francs, bringing the gain this year to 12 percent. That compares with the 2.7 percent increase in the 48-company Bloomberg Europe Banks and Financial Services Index.

Wealth Management

Earnings at the wealth management and Swiss bank division fell 9.7 percent in the first quarter to 1.05 billion francs on higher costs, including personnel expenses.

The wealth management gross margin, the amount of revenue the bank makes on assets under management, rose to 98 basis points from 93 basis points in the year-earlier quarter. Gruebel aims to increase the margin to more than 100 basis points, or 1 percentage point, this year.

The division, which contributed 55 percent of pretax profit in 2010, produces a higher return on equity than the securities unit and will become even more important as stricter capital rules hurt returns at the investment bank, according to analysts.

Wealth management customers pulled assets from UBS during the crisis, spooked by mounting writedowns and a U.S. investigation into whether the bank helped American clients evade taxes. The U.S. Justice Department in October dismissed the case against UBS and the Internal Revenue Service dropped a demand for customer identities in November after the bank turned over data on more than 4,000 clients.

Sales & Trading

“Wealth management is turning around very well,” JPMorgan Chase & Co. analysts led by Kian Abouhossein said in a note to clients today. “The key is now to address the investment bank.”

Photographer: Reto Andreoli/Bloomberg

Oswald Gruebel, chief executive officer of UBS AG. Close

Oswald Gruebel, chief executive officer of UBS AG.

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Photographer: Reto Andreoli/Bloomberg

Oswald Gruebel, chief executive officer of UBS AG.

Wealth Management Americas, which includes the former Paine Webber, reported a jump in pretax profit to 111 million francs from 15 million francs a year earlier, while the asset management unit reported a 9.5 percent decline in earnings to 124 million francs.

Pretax profit at the investment bank, run by Carsten Kengeter, fell 30 percent to 835 million francs. Kengeter, 44, became sole head of the division in November.

Revenue from sales and trading of equities, fixed-income, currencies and commodities declined 9 percent to 3.1 billion francs in the quarter and was the lowest compared with the five biggest U.S. investment-bank competitors, according to data compiled by Bloomberg. UBS aims to boost this revenue to a quarterly rate of about 3.75 billion francs by 2014.

‘Issue with People’

“UBS does not have the scale to compete with top players” especially in the rates business within the fixed-income unit, JPMorgan analysts wrote.

Revenue from the so-called macro business, which includes sales and trading of currencies, money market and interest rate products, fell 40 percent from the year-ago quarter and was “below our expectations and well below our target,” Chief Financial Officer John Cryan said on a conference call today.

“It must be an issue with people,” Cryan, 50, said. “It must be trading strategies and it must be the way that we execute the business, so we’re working on it.”

Gruebel, 67, told Swiss magazine Bilanz in an interview last month that he underestimated how long it would take for the investment bank to rebound after the credit crisis, when UBS amassed more than $57 billion in writedowns and losses. UBS may need to cut costs at the investment bank this year if revenue doesn’t improve, after hiring more than 1,700 bankers for the unit in the past two years, Gruebel said in February.

Trails Competitors

“UBS tried to rebuild the base at the investment bank where there was some degree of business still there,” Christopher Wheeler, a London-based analyst at Mediobanca SpA, said before today’s release. “Gruebel is taking a pragmatic view, saying maybe I can’t just depend on the markets getting better and I have to be a bit more inventive.”

The investment bank saw some “redundancies” in the first quarter of this year and also hired people, primarily in the control functions, Cryan said.

UBS’s revenue at the investment bank has trailed competitors since 2009, when Gruebel set the targets for returning earnings at the unit to pre-crisis levels by 2014. Analysts say Gruebel may cut his targets for the investment bank because they were set before the Basel Committee on Banking Supervision stiffened rules last year, forcing lenders to set aside more capital for their riskiest operations.

Capital Rules

Cryan said the bank is sticking with its targets. The outlook for the trading businesses “seems OK” as markets are seeing some volatility, Cryan said. Client activity levels are “acceptable,” and “a lot better than they had been in the second half of 2010,” he said.

The bank is still reviewing the effects of stricter capital requirements on some of its trading businesses, particularly within the debt unit, Cryan said. The determinant of whether certain units and products will still be viable in the future will be whether the market will be ready to absorb higher prices as a result of the higher cost of capital, he said.

Credit trading, which reported a 33 percent increase in revenue in the first quarter from a year ago, may be one of the investment-banking businesses most hurt by changes in capital rules, according to Wheeler’s analysis.

Swiss regulators have forced UBS and Credit Suisse Group AG to fulfill Basel’s stricter requirements on trading-book capital since January, a year before their international competitors. The Swiss government, which rescued UBS with a 6 billion-franc capital injection during the financial crisis, last week asked parliament to approve legal changes that will require UBS and Credit Suisse Group AG to hold almost twice as much capital as the new Basel rules require starting in 2019.

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

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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