UBS falls after warning profit may be hurt by franc, interest rates

Zurich

UBS Group AG fell after reporting lower-than-expected earnings at its wealth management division and warning that the strong franc and negative interest rates may hurt profitability.

UBS fell as much as 3.4 per cent in morning trading in Zurich, bringing the total decline so far this year to about 8.8 per cent. The bank doubled its dividend, as analysts had forecast, and reported a higher-than-estimated fourth-quarter net income after a tax gain.

UBS, the world's biggest manager of money for the rich, added the lowest amount of net new funds to its main wealth management division since the fourth quarter of 2012. Chief executive officer Sergio Ermotti reorganised Switzerland's biggest bank two years ago to trim its securities unit and focus on money-managing businesses.

"Stripping out the tax gain, underlying earnings missed estimates," said Alevizos Alevizakos, a London-based analyst at Keefe Bruyette & Woods. "All units are lagging except for the investment bank. Wealth management is a particular disappointment, with gross margin and net new money coming in lower than expected."

UBS attracted three billion francs (S$4.4 billion) in net new funds at its wealth management unit in the quarter after 9.8 billion francs in the third quarter. Pre-tax profit at the unit rose 37 per cent to 646 million francs from a year earlier, missing the 676-million-franc estimate of seven analysts.

The gross margin, which shows how much revenue the bank makes on assets under management, fell four basis points to 82 basis points in the fourth quarter from the previous three months. A basis point is one hundredth of a percentage point.

Fourth-quarter net income rose to 963 million francs from 917 million francs a year earlier, after a tax gain of 493 million francs, the Zurich-based bank said on Tuesday. The bank proposed a dividend of 50 centimes a share for 2014 after paying 25 centimes a share for the previous year and in addition to 25 centimes a share the bank proposed paying shareholders after it completes changes to its corporate structure.

The bank had a "solid" start to this year, Mr Ermotti said on Tuesday. Still, the increased value of the franc and negative interest rates in Switzerland and the euro area will put pressure on profitability and targets if they persist, the bank said. It abandoned targets for gross margins in wealth management.

"Everybody's focused on the currency movements, which is something that we'll need to adapt to, but the most negative consequence is clearly the negative interest rates," Mr Ermotti said. "At this time we are passing the cost of negative interest rate on to corporate clients. If this goes further we cannot rule out that more clients will be affected by that."

UBS said last month it did not have negative revenues from its trading businesses "in aggregate" after the Swiss National Bank roiled markets on Jan 15, scrapping a cap on the franc and letting the currency trade freely. The company aims to boost its adjusted return on equity (ROE), a measure of profitability, to about 10 per cent this year and more than 15 per cent from 2016. UBS reported an unadjusted ROE of 7.2 per cent for 2014.

The investment bank's profit rose 24 per cent to 367 million francs, above an estimate of 205 million francs. Revenue from equities trading gained 10 per cent to 918 million francs and the corporate client solutions unit, which includes advisory and underwriting businesses, reported revenue of 712 million francs compared with 706 million francs a year earlier. Revenue from foreign exchange, rates and credit fell 8.3 per cent to 297 million francs.

"UBS did the right thing with its investment bank," said Dirk Becker, a Frankfurt-based analyst at Kepler Cheuvreux. "The areas where they're strong at the investment bank - equities and advisory - fit well with wealth management. But investors pay more attention to wealth management earnings."

Fixed-income trading at the largest US investment banks was down 25 per cent in the fourth quarter, while revenue from equities trading gained 10 per cent, data compiled by Bloomberg Intelligence show.

Earnings in asset management fell 35 per cent to 85 million francs, while the retail and corporate unit posted a 2.4 per cent increase to 340 million francs. Wealth management Americas earnings fell 8.3 per cent to 211 million francs from last year as the unit attracted US$5.5 billion in net new funds.

UBS was fined about US$800 million in November by the regulators in Switzerland, the UK and the US for trying to rig currency markets. The bank had made provisions of 1.84 billion francs in the third quarter for litigation, while in the fourth quarter litigation provisions amounted to 176 million francs. BLOOMBERG