Fitch: Repositioned UBS Performs Well in Difficult Quarter

Wed Oct 30, 2013 11:31am EDT

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(The following statement was released by the rating agency) LONDON/MILAN, October 30 (Fitch) Fitch Ratings says that UBS AG's (UBS; A/Stable/a) Q313 results demonstrate the benefits of its repositioned business model, despite being dented by weaker markets conditions, subdued client activity and continued high litigation costs. The new business model has yielded resilient earnings from its dominant global wealth management (WM), US on-shore wealth management (WMA) and Swiss domestic (R&C) franchises, which helped compensate for weaker but still adequate earnings in its investment bank (IB) division. The results have no immediate impact on UBS's ratings. Fitch expects some earnings volatility to remain until litigation costs decrease and the non-core and legacy portfolios have been further reduced. The bank's leverage has improved and its fully-loaded Basel III Common Equity Tier 1 (CET1) ratio remains solid despite a 50% add-on to operational risk RWAs imposed by the Swiss bank regulator, the Swiss Financial Market Supervisory Authority (FINMA) effective from Q413. UBS's exposure to operational, litigation and regulatory risks remains, in Fitch's view, a downside risk to UBS's ratings in the short- to medium-term as highlighted by FINMA's decision to demand a temporary operational risk RWA add-on (CHF28bn). The 130bps negative impact (from Q413) on UBS's fully-loaded CET1 ratio will largely be offset by UBS exercising its option to acquire the equity in the Swiss National Bank StabFund, also in Q413 (100bps positive impact). Fitch views this add-on largely as a precautionary measure imposed by FINMA during a period of still significant litigation exposure for UBS. Similar to many of its peers, UBS has received information requests from various authorities regarding the bank's foreign exchange business. Litigation outcomes are difficult to predict and Fitch acknowledges that litigation charges reflect UBS's desire to address and reduce outstanding litigation risk. Fitch expects the ultimate cost of litigation and regulatory matters to remain manageable for the bank. However, should the final outcome of these cases affect UBS's ability to maintain strong capitalisation, then UBS's Viability Rating could come under pressure. UBS's pre-tax income, adjusted for fair value of own debt changes (CHF147m charge in Q313), restructuring charges (CHF188m) and gains on sale of real estate (CHF207m), decreased 26% year-on-year (yoy) and 53% quarter-on quarter (qoq). Excluding litigation costs, adjusted pre-tax income rose 5% yoy (40% decline qoq). The qoq fall reflects a seasonally slow third quarter, mainly in IB, and significant charges booked in the corporate centre. UBS's non-IB businesses (WM, WMA, R&C and global asset management, AM) continued to contribute significantly to the bank's total adjusted divisional pre-tax profit (80% in Q313, excluding the CHF1.2bn pre-tax loss in the corporate centre). UBS's IB division reported a lower adjusted pre-tax profit (CHF251m, down 68%) qoq, largely on lower revenues (CHF1.7bn, down 24% qoq) which given UBS's IB business mix is in line with peers. The division reported a 17% adjusted return on average equity in Q313 (34% in 9M13) on an annualised basis despite difficult market conditions and low client risk appetite. The cost to income of UBS's IB division reached 80% in Q313 (at the high end of management's 65%-85% target), underlining the slightly higher compensation ratio at UBS (51% in Q313) compared with that of some peers, although the gap has been declining significantly. UBS's IB equities trading business in its investor client services (ICS) business performed well in Q313 (CHF890m revenue; down 20% qoq and up 23% yoy) while its significantly smaller FX, rates and credit ICS business suffered under challenging market conditions (CHF312m, down 14% qoq, down 25% yoy). Revenues in UBS's corporate client solutions (CCS) business, comprising advisory and underwriting activities, fell 26% yoy and 35% qoq, largely due to lower issuance and M&A volumes in line with market trend. UBS's WM division performed well in Q313 despite a squeeze in gross margin (down 5bps to 85bps) and somewhat lower net new money (NNM) inflows. WM's Q313 adjusted pre-tax profit (CHF617bn) rose 7% yoy and 2% qoq. Fitch expects further cross border outflows in Europe but NNM inflows from other markets should offset this trend and help UBS to remain within its 3%-5% NNM target range. However, UBS will, in Fitch's view, be challenged to meet its gross margin target (95bps to 105bps range) in the absence of an improved operating environment, higher transaction levels and a more favourable AuM mix (at end-Q313, around 28% of advisory AuM were invested in cash, according to management). UBS's WMA, AM and R&C divisions all continued to report sound performances, contributing 13%, 8% and 24% respectively to the bank's total adjusted divisional pre-tax profit (excluding the pre-tax loss in the corporate centre). They all showed a yoy rise in adjusted pre-tax profit, and Fitch expects the three businesses to continue delivering satisfactory and resilient results. UBS's Q313 results included significant charges booked in the corporate centre (CHF1.2bn pre-tax loss). This included losses related to exiting non-core and legacy positions in a more challenging market environment and additional litigation provisions in UBS's core and non-core corporate centre divisions. Excluding the FINMA-imposed operational risk add-on, UBS continued to reduce RWA in the quarter although RWA reductions in its non-core and legacy portfolios slowed down somewhat. This was, in Fitch's view, the result of a more challenging quarter for asset disposals and also because UBS's remaining non-core and legacy positions were more complex to unwind or dispose of. UBS's capitalisation is a key rating strength and its end-Q313 Basel III 'fully applied' CET1 ratio of 11.9% (11.6% if adjusted for the operational risk add-on and the exercise of the StabFund option in Q413) compares favourably with that of peers. UBS's un-weighted leverage, according to the Swiss interpretation of Basel III regulations, reached 3% on a 'fully loaded' basis at end-Q313 (or 3.2% when the Q413 exercise of the Stab Fund option is factored in). Fitch expects leverage to improve further as the bank progressively reduces its non-core and legacy portfolios. Contact: Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Francois-Xavier Marchand Associate Director +33 1 44 29 91 46 Christian Scarafia Senior Director +39 02 87 90 87 212 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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