UBS Reports Higher Profit, U.S. Mortgage Bond Settlement

UBS AG, Switzerland’s largest bank, reported an increase in second-quarter profit and said it’s close to a settlement over U.S. mortgage-backed bond sales.

UBS rose in Zurich trading after posting net income of about 690 million Swiss francs ($734 million). Profit climbed from 524 million francs a year ago and beat the 586 million-franc mean estimate of four analysts surveyed this month by Bloomberg. UBS attracted about 12.8 billion francs in net new funds to its wealth management units and increased its capital buffer, the bank said.

“The big plus is stronger capital and the inflows in wealth management have gone well,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA.

The bank reached an agreement in principle with the U.S. Federal Housing Finance Agency to settle claims related to residential mortgage-backed securities offerings between 2004 and 2007, UBS said, without disclosing the cost of the settlement. The company is booking about 865 million francs of pretax charges, provisions and writedowns in the quarter related to the settlement and a Swiss-U.K. tax agreement.

UBS exceeded analysts’ profit estimates for a second quarter in a row after Chief Executive Officer Sergio Ermotti announced 10,000 job cuts last year and a strategy to exit most debt-trading businesses at the investment bank to focus the firm on money management.

Higher Capital

UBS’s operating profit before tax in the quarter amounted to about 1.02 billion francs and its common equity ratio under fully-applied Basel III rules rose to about 11.2 percent from 10.1 percent at the end of March. The bank will publish full quarterly results July 30.

“UBS has comfortably beaten forecasts,” Matt Spick, an analyst at Deutsche Bank AG who rates UBS a buy, wrote in a note to clients today. While the company gave few details, “we also see the read-across to Credit Suisse as potentially positive,” Spick said.

Credit Suisse Group AG, the second-largest Swiss bank, is scheduled to publish earnings on July 25.

UBS shares climbed 2.5 percent to 18.05 francs, bringing the gain this year to 26 percent, compared with a 7.4 percent increase in the 40-company Bloomberg Europe Banks and Financial Services Index. Credit Suisse advanced 1.7 percent to 28.40 francs today.

Mortgage Suit

Knight Vinke Asset Management LLC, a shareholder based in New York, said in a statement today it remains “concerned that UBS’s very valuable wealth management franchise continues to be buffeted by investment banking related losses.” In an open letter in May, Knight Vinke said UBS should spin off its investment bank.

The investor said it met with UBS shareholders representing more than 30 percent of the share capital and plans to continue consultations through most of the third quarter, as well as seek meetings with members of the bank’s board.

The FHFA sued UBS in 2011 over $4.5 billion in residential mortgage-backed securities that UBS sponsored and $1.8 billion of third-party RMBS sold to Fannie Mae and Freddie Mac, claiming the bank misstated the securities’ risks. These suits alleged losses of at least $1.2 billion plus interest.

The FHFA sued 17 other banks later that year, seeking to recover losses on $196 billion in mortgage-backed bonds sold to Fannie Mae and Freddie Mac, which have operated under U.S. conservatorship since they were seized amid subprime losses in 2008. Citigroup Inc. reached a settlement with the FHFA in May on a lawsuit over $3.5 billion in bonds the bank sold to Fannie Mae and Freddie Mac.

Tax Deal

“We believe UBS has settled with the FHFA to move on quickly from its legacy issues,” Kian Abouhossein and Amit Ranjan, London-based analysts at JPMorgan Chase & Co., said in a note. “While litigation remains an overhang for the sector overall, in our view the settlement does suggest relatively lower litigation risk for UBS going forward.”

The full cost of the settlement, which still needs final approvals, would be covered by previous provisions and those taken in the second quarter, UBS said. At the end of 2012, UBS had $658 million in provisions related to sales of residential mortgage-backed securities and mortgages.

The bank is booking about 700 million francs of charges in the second quarter at the unit that focuses on reducing non-core and legacy assets. It will take about 100 million francs in wealth management because of the Swiss-U.K. tax agreement, which requires banks to collect taxes on accounts of U.K. citizens. The accord has been in force since the beginning of the year.

The Swiss Bankers Association said earlier this month that the country’s banks face losses of about 500 million francs on payments made to the U.K. government as part of the deal related to untaxed assets in Switzerland.

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