RPT-Fitch: UBS 4Q13 Performance Benefits from Less Volatile Business model

Wed Feb 5, 2014 8:33am EST

Feb 5 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that UBS AG's (UBS; A/Stable/a) solid 4Q13 results with resilient performances in all its business lines show that the bank has largely completed the fundamental repositioning of its investment bank (IB). While UBS's net profitability in 2014 is likely to remain affected by still high litigation charges, restructuring costs and costs relating to exiting its remaining non-core and legacy portfolio, in our view, underlying profitability is likely to remain sound in all its core businesses, including its revamped IB. The results have no immediate impact on UBS's ratings.

UBS continued to improve its Basel III capital and leverage ratios in 4Q13, helped among other things by the exercise of the Swiss National Bank (SNB) StabFund option.

Adjusted for a CHF94m loss on own credit, CHF198m net restructuring charges, a CHF75m net loss relating to debt buy backs and a CHF61m gain from the disposal of real estate, UBS reported a CHF755m adjusted pre-tax profit for 4Q13. While its 2013 adjusted return on equity of 8.3% (4.2% for 2012) was still lower than its 15% guidance for 2015, we consider that UBS is well positioned to meet this target in 2015 assuming litigation and restructuring charges start to fall towards the end of 2014. Reported net profit for the quarter (CHF919m) benefited from a CHF470m net tax benefit, which largely related to a CHF589m write-up of deferred tax assets, predominately related to its businesses in the US and Switzerland.

Operating revenue improved q-o-q and y-o-y in all of UBS's operating business divisions (wealth management (WM), US wealth management (WMA), global asset management (AM), and IB) except in its Swiss domestic (R&C) franchise, where slightly higher net loan impairment charges led to a marginal decline q-o-q. UBS's IB division reported a 9% q-o-q increase in operating revenue and an adjusted return on allocated equity above its 15% target (20%; despite lower RWA utilisation (if incremental operating risk RWA are excluded)), a lower funded balance sheet and only marginally higher average value-at-risk utilisation (CHF11m compared with CHF10m in 3Q13). IB improvements were largely driven by better revenue in the bank's corporate clients solutions unit, notably a strong performance in advisory in Asia Pacific and Europe as well as in equity capital markets. Revenue in UBS's investor client services business, which is dominated by the bank's solid equities trading franchise were essentially flat q-o-q in a challenging quarter, but compared well with most peers' performance, which showed greater volatility in securities trading revenue.

Both UBS's wealth management businesses reported a solid performance for the quarter despite a still adverse operating environment. In WM, net new money inflows improved somewhat (to CHF5.8bn) largely because of strong inflows in Asia compensating for moderate net outflows in UBS's European offshore businesses. Given the still suppressed gross margin (85bps in 4Q13, unchanged q-o-q), in our view, UBS's WM franchise is well placed to benefit from improving market conditions, although we believe it will be challenging for the bank to meet its 95bps to 105bps gross margin target in the short- to medium-term. Adjusted pre-tax losses in UBS's corporate centre - core functions (CC-CF) and corporate centre - non-core and legacy portfolio functions remained significant in the quarter at CHF464m and CHF422m, respectively. CC-CF pre-tax losses largely relate to unallocated funding costs from long-term funding from UBS's legacy IB assets (reported in non-core) and according to management, will be slightly lower in 2014 (from CHF510m in 2013), falling to around CHF100m in 2015 and a negligible amount in 2016. We expect the performance of UBS's non-core and legacy portfolio to remain unpredictable with losses booked largely depending on market conditions and the speed of asset disposals and wind-downs.

UBS's capitalisation is a key rating strength. The bank's fully-loaded Basel III common equity Tier 1 (CET1) ratio improved further to 12.8% at end-2013, which is the highest within its peer group. UBS is well on track to meet its 13% fully-loaded CET1 ratio target in 2014. The 90bps improvement q-o-q was predominately due to CHF2.9bn higher CET1 capital (largely driven by UBS exercising the SNB StabFund option which resulted in CHF2.5bn higher CET1 capital). Fully-applied RWA increased by CHF6bn (to CHF225bn) with RWA reductions in CC-NC (down CHF12bn q-o-q) and IB (down CHF3bn) being more than offset by CHF22.5bn incremental operational risk RWA imposed by FINMA. UBS's unweighted leverage, according to the Swiss interpretation of Basel III regulations, reached 3.4% on a 'fully loaded' basis at end-4Q13 and compares adequately with European and most US peers. Fitch expects leverage to improve further as the bank progressively reduces its non-core and legacy portfolios. Fitch expects UBS's incremental operational risk RWA add-on to gradually fall as UBS provides for or resolves outstanding litigation or regulatory matters. Nonetheless, UBS's exposure to operational, litigation and regulatory risks remains, in Fitch's view, a downside risk to UBS's Viability Rating in the short to medium term. 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 its Viability Rating could come under pressure.

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