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UBS Wealth Management Inflows Top Estimates; Shares Rise

UBS Posts 54% Drop in Profit on Investment Bank, Debt Charge
UBS has risen 1.3 percent in Zurich trading this year, trailing the 4.4 percent gain in the 43-company Bloomberg Europe Banks and Financial Services Index. Photographer: Valentin Flauraud/Bloomberg

UBS AG, Switzerland’s biggest bank, attracted more funds from wealthy clients in the first quarter than analysts estimated, sending the company’s shares to the biggest advance in two weeks.

UBS rose 3.7 percent in Zurich trading after saying its wealth management units attracted 10.9 billion Swiss francs ($12 billion) in net new funds, more than the 8.8 billion-franc estimate of analysts surveyed by Bloomberg.

“I’m very impressed,” said Ralph Silva, a strategist at Silva Research Network, in an interview on Bloomberg Television today. “UBS has done an incredible job over the past few years. It’s an incredible feat, if you consider how poor the UBS brand was a mere 12 months ago.”

Chief Executive Officer Sergio Ermotti said he’s “confident” the bank will continue to rebuild its wealth management business while market conditions remain “challenging.” UBS is shrinking its investment bank by almost half to focus more on business with wealthy customers.

UBS rose 42 centimes to 11.75 francs. The stock’s 5.1 percent advance this year compares with a 2.4 percent gain in the 43-company Bloomberg Europe Banks and Financial Services Index and a 3.7 percent decline at Credit Suisse Group AG, its biggest Swiss competitor.

Wealth Management

Net income in the first quarter fell 54 percent to 827 million francs from 1.81 billion francs in the year-earlier period, after a charge related to the company’s own debt and a 17 percent drop in revenue led to a loss at the investment bank. Profit surpassed the average estimate of 810.9 million francs in a survey of nine analysts.

“We still see the same situation: clients’ activity is very volatile, clients are very uncertain considering what’s going on in Europe and overall in the macroeconomic conditions of the world,” Ermotti said in an interview with Bloomberg Television. “Therefore it’s going to be still a challenging environment.”

Wealth management profit rose 24 percent to 803 million francs, helped by a reduction in expenses related to changes in the company’s Swiss pension plan, while wealth management Americas increased earnings 71 percent to 190 million francs.

UBS managed 1.5 trillion francs in assets for wealthy clients at the end of March. The company, which posted the biggest loss in Swiss corporate history in 2008, saw net inflows resume in the third quarter of 2010 after customers pulled a net 233.7 billion francs in the 10 prior quarters.

Not ‘So Rosy’

“Our people are working very hard to continue this trend,” Ermotti said. “Net new money is also a function of wealth creation and the economic conditions out there are not necessarily so rosy. But we’re confident that we can continue to regain back our leading position.”

UBS was ranked the third-biggest wealth manager by assets under management after Charlotte, North Carolina-based Bank of America Corp. and New York-based Morgan Stanley in a survey published in July by Scorpio Partnership, a London-based provider of research and industry analysis.

UBS attracted 4.9 billion francs in money from rich clients from the Asia Pacific, 3.2 billion francs in Switzerland and 1.2 billion francs from emerging markets, while European customers pulled a net 2.7 billion francs. Wealth management Americas added 4.2 billion francs in the quarter.

“The improved net new money inflows, especially from Switzerland and emerging markets, show that confidence has returned to the bank and profitability is improving,” Teresa Nielsen, an analyst at Vontobel Holding AG, said in a note. “The bank is well capitalized to withstand potential economic shocks.”

Accounting Charge

The bank’s Tier 1 capital ratio rose to 18.7 percent at the end of March from 15.9 percent at the end of 2011. UBS said in November it intends to cut risk-weighted assets at the investment bank by 145 billion francs from 300 billion francs by 2016, under Basel III rules. Risk-weighted assets at the investment bank were cut by about 21 billion francs in the first quarter.

UBS’s earnings in the quarter were burdened by a 1.16 billion-franc charge related to the bank’s own debt. The accounting charge stems from a rule that requires banks to book a loss if the price of their debt increases. The investment bank posted a pretax loss of 373 million francs compared with a profit of 833 million francs a year earlier. Excluding the charge, the unit had a pretax profit of 730 million francs.

Trading Revenue

Revenues at the investment bank fell to 2.89 billion francs in the quarter from 3.5 billion francs a year earlier. The unit’s revenue from sales and trading fell 18 percent to 2.49 billion francs, while Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America and Morgan Stanley on average reported a 6.1 percent increase in trading revenues excluding valuation adjustments, data compiled by Bloomberg show.

“We’re defining a new business model, which is a business model based on our desire to reduce capital allocation in the investment bank and also the reality of Basel III,” Ermotti said. “That’s our benchmark. We’re not too bothered about benchmarking against players that have different business mix or different strategic goals or different regulatory environments.”

Leadership Changes

The company said in March that Andrea Orcel, a top Bank of America dealmaker, will join in July to run the investment bank with 45-year-old Carsten Kengeter. Orcel, 48, who joined Merrill Lynch & Co. in 1992, was among the biggest dealmakers when the firm was independent, and was named chairman of global banking and markets after Bank of America acquired Merrill Lynch in September 2008.

The Italian banker, who got a reported $33.8 million in compensation for 2008, will be joining other former Merrill Lynch employees at UBS, including Ermotti, Robert McCann, 54, who heads business in the Americas, and Mike Stewart, 43, who heads the global equities business at the investment bank.

UBS was shaken by the discovery of a $2.3 billion loss from unauthorized trading in September, which resulted in the departure of CEO Oswald Gruebel, 68. Chairman Kaspar Villiger, 71, plans to step down at the bank’s annual shareholder meeting tomorrow after former Bundesbank President Axel Weber, 55, is elected to the board of directors.

Credit Suisse last week reported that its securities unit also benefited less from the rebound in debt markets in the first quarter than U.S. competitors as the Zurich-based company accelerated the reduction of risk-weighted assets. Net income fell to 44 million francs from 1.14 billion francs in the year-earlier period after accounting charges related to Credit Suisse’s own debt and costs for 2011 bonuses.

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