UBS AG (UBSN), the Swiss bank bailed out in 2008, plans to buy back the fund set up by the central bank during the financial crisis that helped it shed toxic assets.
UBS climbed as much as 3.2 percent in Zurich trading after saying the purchase of the fund, which had $10.8 billion of assets and $5.5 billion of equity at the end of 2012, would increase its capital ratios. Net income rose by 32 percent in the second quarter from a year earlier, UBS also said today.
Chief Executive Officer Sergio Ermotti, who last year announced plans to cut 10,000 jobs and scale back the investment bank, is speeding up efforts to increase the bank’s capital ratio to a target of 13 percent. Buying back the fund would close a difficult chapter for the bank as it concentrates on managing money for wealthy clients.
UBS will “try our best” to complete its deleveraging plan as quickly as possible, Ermotti, 53, said in a Bloomberg Television interview today. “We’re very focused and disciplined on executing our strategy.”
The largest Swiss bank won’t pay a material dividend before reaching the 13 percent common equity target, which it expects to happen in 2014, Ermotti said. UBS provided investors a payout of 15 centimes a share for 2012.
UBS gained 2.4 percent to 18.17 francs by 4:52 p.m. in Zurich trading. The stock is up 27 percent this year, compared with an 8 percent increase in the 44-company Bloomberg Europe Banks and Financial Services Index.
UBS needed state aid after the bankruptcy of Lehman Brothers Holdings Inc. in 2008 froze financial markets and the Swiss bank’s mistimed bet on the U.S. housing market resulted in more than $57 billion in writedowns and losses during the subprime crisis.
The company spun off $38.7 billion of risky assets into the Swiss National Bank fund, while the government provided 6 billion francs ($6.4 billion) of equity and the SNB made a loan to support the assets as they were being run down. The Swiss government sold its investment in UBS less than a year later for a profit of 1.2 billion francs.
As part of the rescue, UBS was granted an option to buy back the equity of the fund once the SNB loan was repaid. Under that arrangement, UBS would pay the central bank $1 billion plus 50 percent of the value of equity exceeding that level -- amounting to about $3.25 billion based on values at the end of last year.
Officials at UBS and the SNB declined to provide figures for the stability fund’s balance sheet since the end of December. The fund posted a profit of $830 million in the first half of this year, the central bank reported today.
The SNB loan, which is being repaid from the fund’s proceeds, decreased to 1.2 billion francs by the end of the second quarter.
UBS doesn’t see any impact on earnings from taking over the fund and expects it to add between 3 billion francs and 7 billion francs of risk-weighted assets to its balance sheet, the bank said.
Adding the fund’s equity will lift UBS’s common equity ratio under Basel III rules, which stood at 11.2 percent at the end of June, by 70 basis points to 90 basis points in the fourth quarter, UBS said. A basis point is equivalent to a hundredth of a percentage point.
UBS’s capital ratio is “at the highest level among global peers,” JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan, who rate UBS overweight, said in a note to clients today. The stock is “cheap considering its business mix.”
The bank cut 20 billion francs of risk-weighted assets in the quarter, surpassing its target for the end of the year. That helped lift UBS’s common equity ratio from 10.1 percent at the end of March.
UBS isn’t alone in seeking to bolster capital. Barclays Plc (BARC), the U.K.’s second-largest bank by assets, plans to raise 5.8 billion pounds ($8.9 billion) in a rights offering, the London-based firm said today. Deutsche Bank AG, continental Europe’s biggest bank, plans to shrink its balance sheet by 250 billion euros ($331.9 billion), the Frankfurt-based bank said today.
Deutsche Bank boosted its common equity Tier 1 capital ratio to 10 percent at the end of June from 8.8 percent in March after selling almost 3 billion euros of shares and reducing risky assets, the company said in a statement today.
UBS posted preliminary earnings last week that beat analysts’ estimates, even as it booked charges tied to an $885 million settlement with the U.S. Federal Housing Finance Agency over mortgage-backed bond sales.
The investment bank had a pretax profit of 775 million francs, compared with a 92 million-franc loss a year earlier, while earnings at the wealth-management division rose 11 percent to 557 million francs, UBS said today. Net income increased to 690 million francs from 524 million francs.
Second-quarter revenue at the investment bank rose 60 percent from a year earlier to 2.25 billion francs. Revenue from equities sales and trading more than quadrupled to 1.11 billion francs, and advisory and underwriting gained 12 percent to 771 million francs. The foreign exchange, rates and credit unit reported a 21 percent decline in revenue to 362 million francs. The adjusted pretax return on equity amounted to 38 percent, compared with 47 percent in the first quarter and a target of more than 15 percent.
“UBS reached the best second quarter in equities in three years,” Abouhossein and Ranjan said in the note. “More importantly restructuring is well on track, with 2 billion francs of cost savings achieved versus” the first half of 2011.
UBS’s wealth management unit reported a 1 basis point decrease in the gross margin, which reflects how much revenue the bank makes on assets it oversees, to 90 basis points from 91 basis points in the first quarter. Clients’ cash balances rose again in the quarter, as market volatility and uncertainty spooked investors, Ermotti said.
“It’s yet another confirmation that until all the issues out there in terms of macroeconomic, geopolitical problems, the euro-zone problem are not resolved, clients’ risk appetite won’t change,” Ermotti said.
The unit attracted 10.1 billion francs in net new money, with emerging markets and the Asia-Pacific regions driving growth, and the most money coming from ultra-high-net-worth individuals. Wealth management Americas added 2.7 billion francs in net new funds and asset management saw an outflow of 2 billion francs.
UBS for the first time said how much money it makes on assets of ultra-high-net-worth clients, who typically have more than $50 million to invest. The super-rich segment has “compelling economics and growth prospects,” as the lower costs of running the business make up for a lower margin on assets under management, the bank said.
UBS said its net margin on ultra-high-net-worth assets, which amounted to 394 billion francs at the end of June, was 24 basis points, compared with 40 basis points for other clients. The ratio of pretax profit to revenue was 43 percent for the wealthiest, compared with 33 percent for the others. The bank had 468 billion francs in assets under management for other clients.
The bank booked a 104 million-franc charge in wealth management because of the Swiss-U.K. tax agreement, which requires banks to collect taxes on accounts of U.K. citizens.
Pretax profit at the wealth management Americas division rose 20 percent to 243 million francs and asset management earnings increased 9.5 percent to 138 million francs, while the retail and corporate unit saw a 5.5 percent decline to 377 million francs.
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