Lending and recruiting offset weaknesses in UBS earnings

Pretax profits were down 21% year-over-year at UBS Wealth Management Americas in its latest quarterly earnings, but one-time litigation expenses and growth in other parts of the business suggest that the wirehouse's bottom line may bounce back.

Aggressive recruiting of elite advisers and a drive to boost banking and lending services to clients helped offset weaknesses in UBS' results, particularly a 16% year-over-year decline in transaction-based income.
UBS reported that net interest income was up 27%, rising to $351 million for the quarter, and has been rising consistently for two years. Overall, revenue growth was flat year-over-year.

Pretax profits for the Americas wealth management unit fell to $212 million from $268 million for the year-ago period. However, they bounced back from the prior quarter when UBS reported a mere $13 million in pretax profits due in part to litigation costs related to the firm's sale of closed-end funds of Puerto Rico municipal bonds.

The wirehouse has been facing numerous arbitration claims lodged by clients. In its earnings report, UBS said aggregate claimed damages totaled $1.6 billion. But as those cases are resolved, the firm's expenses shoulddrop.

For the recent quarter, general and administrative expenses fell to $145 million from $348 million from the previous period, largely due to lower litigation costs, the firm says.

In recent months, UBS has also been aggressively recruiting top talent from other firms, particularly Credit Suisse which announced last October that it was exiting the U.S. wealth management market. UBS picked up more than 70 advisors from the firm, according to people familiar with the matter.
The wirehouse said its adviser force numbered 7,145, up five advisers from the previous quarter and 163 from the same period a year ago. As a result, recruitment loans to financial advisers grew 13% year-over-year, reaching $3.25 billion for the quarter.

Those new recruits are helping the firm bring in new assets.

UBS reported $13.6 billion in net new money for the quarter, down from $16.8 billion for the previous quarter but up from $4.8 billion for the year-ago period. Client assets were flat year-over-year, but rose 1% from the previous quarter to reach $1.099 trillion.

Competitors have recently reported declining revenues and AUM, blaming the results on the markets. Wealth management revenues dropped 3% Wells Fargo and 2.6% at Merrill Lynch. Even Raymond James, which has previously reported strong growth, said revenue for the recent quarter increased a mere 1%.

James Gorman, CEO of Morgan Stanley, which reported a 4% decline in wealth management revenue, has been cutting costs companywide. He didn't rule out additional measures if necessary.

"If these markets were to continue as is, our goals will be extremely difficult to achieve, and we would therefore take additional appropriate actions," Gorman said in a conference call with analysts.

Gorman said that the bank is reviewing every product and business to "convince ourselves that we need our footprint as its currently configured."

Echoing those sentiments, UBS chief executive Sergio Ermotti emphasized the necessity of cost discipline in the face of difficult markets.

"In view of exceptionally low client activity levels, we continued to manage our resources effectively while making progress on costs," Ermotti said in a statement.

OVERALL RESULTS
Companywide, first-quarter profit missed analysts' estimates, hurt by the weakest start to the year in investment banking since Ermotti began to reshape that business four years ago.
Net income fell 64% to 707 million Swiss francs ($741 million) from a year earlier, the Zurich-based bank said on Tuesday. The investment bank, led by Andrea Orcel, posted the largest drop among global firms in fees from advising on mergers and underwriting stock and bond deals, and its 25% decline in trading revenue was worse than the average of that group.

Ermotti, 55, has cut thousands of jobs and scaled back the bank's rates and credit businesses to focus on wealth management since taking over in 2011. While UBS shares have trailed this year's declines at Deutsche Bank and Credit Suisse, the CEO signaled that earnings will remain under pressure amid a "challenging" environment.

"This shows that UBS -- like many of its peers -- has a fixed cost base that is too high for the kind of tough quarter we have seen," said Chris Wheeler, a London-based analyst at Atlantic Equities. "To maintain a superior profitability through the good and bad cycles, they are going to have to address that."

UBS shares dropped 7.5% to 15.29 francs in Zurich on Tuesday. They have tumbled about 22% this year, while Swiss rival Credit Suisse, which is following UBS in shrinking its securities business to focus on wealth management, has lost 36%.

With Bloomberg reporting.