CORRECTED-UBS Wealth Americas 2nd-quarter net falls despite record revenue

Tue Jul 29, 2014 2:50pm EDT

(Corrects managed account asset total in eighth paragraph to $336 billion, not $33 billion.)

By Jed Horowitz

NEW YORK, July 29 (Reuters) - UBS Wealth Management Americas, the smallest of the four biggest U.S. brokerage firms, said on Tuesday its second-quarter pretax operating profit fell 3 percent as clients withdrew money and expenses jumped.

Operating expenses at the New York-based unit of Swiss banking giant UBS AG were up 8 percent to $1.7 billion on higher legal, compensation and recruiting costs and shared service costs with its parent.

Revenue climbed 7 percent to a record $1.9 billion as the firm's 7,119 brokers collected more managed account fees and arranged more loans that generated higher net interest income.

UBS Wealth Americas said its cost-income ratio, a measure of expenses as a percent of revenue, was "within target range" at 87.4 percent, though it was up from 86.2 percent a year earlier. The business was plagued by high expenses that totaled more than 90 percent of revenue when Chief Executive Officer Robert McCann joined from Merrill Lynch in 2009.

Pretax operating profit, which contributed 17 percent to the parent company's total operating profit, declined to $238 million from $245 million a year ago. Broker compensation and recruiting commitments each rose 8 percent to a total of $926 million. UBS Wealth had $2.99 billion of recruitment loans to brokers on its books as of June 30.

Like Morgan Stanley, Merrill Lynch and Wells Fargo Advisors, UBS' larger U.S. competitors, the firm has been harvesting income by encouraging clients to use fee-based accounts tied to assets kept at the firms rather than charging them trading commissions.

Recurring income, comprised mostly of managed account fees, jumped 13 percent to $1.42 billion, or 74.9 percent of total revenue, while commissions fell 2 percent to $464 million on lower municipal securities trading. UBS said the big fee jump reflected charges to clients based on higher assets in their accounts at the end of the first quarter.

Managed account assets soared by $16 billion to $336 billion, or one-third of total invested assets, at June 30. The jump reflected market gains rather than new assets, since UBS said clients withdrew a net $2.5 billion from their accounts during the quarter to cover "seasonal" tax payments. In the year-earlier quarter clients added more than $2 billion of net new money.

Clients' total invested assets still rose to a record $1.02 trillion from $892 billion a year ago, reflecting strong market performance. The profit margin on the assets of 0.76 percent, however, was at the lower end of UBS AG's target range.

UBS brokers ended the quarter on track to each produce an average of $1.07 million in revenue this year, which would be a record, and were heeding the bank's directive to sell loans. Average mortgage balances grew 5 percent during the quarter and securities-based loan balances rose 4 percent.

Credit loss expenses for bad loans rose to $2 million from zero a year earlier, and the firm reserved $44 million for undisclosed litigation and regulatory matters. On Tuesday, its parent company said it took a $281 million charge for a tax settlement.

UBS Wealth Americas added a net six advisers during the quarter. CEO McCann has said he is satisfied with a sales force of about 7,000, about half the size of Morgan Stanley, Wells Fargo and Merrill Lynch. (Editing by Jeffrey Benkoe)