ZURICH Switzerland's UBS UBSN.VX swung to a larger-than-expected fourth-quarter profit on Tuesday and announced higher dividends and bonuses, some reward for bucking trends to shrink its investment bank and reduce riskier activities.
Shares were up 3 percent, but the Zurich-based group maintained a conservative outlook with a rout in emerging markets unnerving wealthy clients at the core of its wealth management business. The violent swings may hit first-quarter net new money, revenue and interest margins, it said.
UBS, calling the year "transformational", said net profit for the quarter stood at 917 million Swiss francs ($1.02 billion) after it booked a 470 million franc gain from deferring taxes.
The result was nearly three times the 354 million francs average estimate of 16 analysts polled by Reuters and a turnaround from last year's 1.89 billion francs loss when it was fined for trying to rig global interest rates.
UBS grew its bonus pool by 28 percent to 3.2 billion francs from 2012, when awards were cut after it had to pay out $1.5 billion to settle the interest rate allegations.
The earnings represent a vindication of sorts for UBS's decision to shrink its investment bank and largely withdraw from riskier activities such as bond trading, where falling prices have stung rivals such as Goldman Sachs (GS.N), Citigroup (C.N) and Deutsche Bank (DBKGn.DE).
But analysts homed in on the subdued outlook for UBS's private bank, which accounts for over half of revenues.
"All in, this is a mixed set of results. On the positive side, there is a substantial "beat" on capital," Goldman Sachs' analysts said in a note. "On the negative side, the all-important trends in the private bank were muted - flat margin, and in-line net new money."
Profits from UBS's private bank rose 18 percent, but spending crept higher, in part due to bigger bonuses, and margins were flat. The unit won 5.8 billion francs in new funds from clients, much of it from Asia and from the very rich, or those with more than $50 million to bank.
UBS's revamped investment bank swung to a 297 million franc pre-tax profit in the quarter, up 18 percent from the quarter before, as a surge in stock markets bolstered equity trading and advisory fees.
UBS shares, which had fallen around 9 percent since mid-January, were the top performing bank stock in Europe, rising over 3 percent compared with a flat European index .SX7P.
In a boost for UBS's capital position, Switzerland's financial regulator agreed to cut the additional amount of reserves the bank needs to hold against litigation, compliance and other operational risks to 22.5 billion francs from 28 billion francs three months ago.
In slides released alongside its quarterly report, the Swiss bank said it expected elevated charges for litigation, regulatory and similar matters in 2014. UBS has a 1.7 billion franc war-chest to deal with legal tangles.
UBS is one of a number of banks cooperating with a global investigation in to possible manipulation in the $5.3 trillion-a-day foreign exchange market. It said on Tuesday several class action lawsuits relating to the probe had been filed against it and other banks.
Regulatory authorities are looking at whether traders at some of the world's biggest banks colluded to manipulate benchmark foreign-exchange rates used to set the value of trillions of dollars of investments.
UBS said the 2013 earnings will allow it to pay shareholders 0.25 Swiss francs a share for the year, two-thirds more than in 2012.
UBS repeated a pledge to pay out more than 50 percent of profits once its common equity Tier 1 ratio, a key measure of financial strength, hits 13 percent. It rose to 12.8 percent in the fourth quarter.
UBS's 2013 dividend represents a 30 percent payout ratio. ($1 = 0.9027 Swiss francs)
(Reporting By Katharina Bart, editing by Carmel Crimmins and Elizabeth Piper)