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Fitch: Diversification, Restructuring Efforts Generate Strong 1Q17 at UBS
April 28, 2017 / 3:36 PM / 8 months ago

Fitch: Diversification, Restructuring Efforts Generate Strong 1Q17 at UBS

(The following statement was released by the rating agency) LONDON, April 28 (Fitch) UBS Group AG posted strong 1Q17 results, reflecting the benefits of a geographically diversified wealth management franchise and a recovery in underwriting revenues following a 1Q16 characterised by historically low client activity, says Fitch Ratings. UBS made continued progress in its cost reduction programme, the effects of which started to become more visible. The bank guided that it expects currently strong profitability in its domestic Personal & Corporate Banking (P&C) division to weaken, notably due to low or negative Swiss franc and euro interest rates. However, we expect this to be partly offset by higher US dollar interest rates that should help Wealth Management Americas' (WMA) performance in particular. UBS generated CHF1.7 billion pre-tax profit in 1Q17, materially higher than the prior-year quarter (CHF0.7 billion) and equating to a strong reported 10.9% return on tangible equity, the most profitable quarter by this measure since 3Q15. Higher underwriting and advisory revenues in the investment bank were the key business driver for the improvement, but all business divisions posted yoy pre-tax profit rises. Non-recurring gains on the asset and liability management (ALM) portfolio resulted in a sharp CHF211 million yoy pre-tax profit swing in the corporate centre, which also materially impacted the group's yoy pre-tax profit increase. The bank's global wealth management franchise saw improved pre-tax profit and remained the largest contributor to results, as pre-tax profit across Wealth Management (WM) and WMA accounted for around a third of group's 1Q17 pre-tax profit excluding the corporate centre. Cost reductions benefited WM's pre-tax profit, 15% higher yoy to CHF639 million in 1Q17. Higher transactional revenue, mainly led by Asia Pacific, more than offset falls in net interest and recurring net fee income. The net interest income fall was partly attributable to a change in the internal allocation of ALM revenues. We expect the retrocession-free model to lead to pressure on recurring fee income, partly offset by improving mandate penetration, and by the bank's stated aim to improve interest income through loan growth. Net margins on assets under management (AuM) increased 2bp yoy to 29bp in 1Q17 despite strong 8% net new money growth, although this can vary by quarter. The 43% yoy improvement in WMA's pre-tax profit to CHF301 million benefited from greater revenue momentum, partly due to the division's exposure to higher short-term US dollar interest rates. However, revenue improvement was broad-based across net interest, recurring fee and transaction-based income. Net new money growth was muted at 0.7% as UBS shifts its focus from advisor recruitment to retention. Accordingly, recruitment loan balances fell qoq to just under CHF3 billion. UBS's Investment Bank (IB) contributed CHF480 million pre-tax profit in 1Q17 (22% of the group), nearly double 1Q16 pre-tax profit, mainly reflecting a 12% revenue improvement as costs remained broadly flat. Advisory revenues rose 26% yoy, and both equity and debt capital market revenues saw sharp recoveries from 1Q16, reflecting activity notably in M&A, public offerings and leveraged finance. In contrast to US global trading and universal bank (GTUB) peers, sales and trading revenues (around two-thirds of IB revenue in 1Q17) fell marginally yoy, as a 6% fall in fixed income revenues outstripped a 2% improvement in equities, largely driven by prime brokerage activity. UBS's fixed income franchise, focused on rates and FX, where client activity was subdued, did not benefit as much as other peers from good market conditions in credit. Pre-tax profit in P&C rose 5% yoy to CHF418 million, highlighting strong cost discipline as net interest income remained under pressure. This reflected the negative impact from low or negative interest rates, as well as higher funding costs allocations. UBS guided it expects quarterly pre-tax profit to be closer to CHF350 million in the short- to medium-term given net interest income pressure. The yoy revenue decline in 1Q17 was partly offset by higher transactional income. Reduced operating expenses also helped Asset Management's pre-tax profit rise 14% to CHF103 million in 1Q17, as a continued client shift towards passive investments, together with an impairment loss on a fund co-investment, drove a 4% revenue decline. UBS maintains a sound franchise in passive products, as demonstrated by a large passively managed AuM inflow during the quarter, contributing to a strong 13% net new money growth rate in the quarter. We expect cost reductions will be important to underpin profitability in asset management absent a material shift to higher margin actively managed investment products. UBS's fully-loaded CET1 ratio rose 30bp qoq to 14.1%, well above the European GTUB peer average, largely led by internal capital generation, as risk-weighted assets were broadly flat qoq. The group's fully-loaded Tier 1 leverage ratio was broadly unchanged qoq at 4.6%, as higher CET1 capital was offset by a 1% qoq increase in leverage exposure. Continued TLAC-eligible senior unsecured debt issuance led to an improvement in the group's gone concern too-big-to-fail Swiss leverage ratio, which stood at 3.8% at end-1Q17. The group should be well on track to meet a 5% gone concern leverage ratio by 2020. Contact: Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido Associate Director +44 20 3530 1631 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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 WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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