January 22, 2018 / 12:28 PM / a year ago

US advisory weakness hurts UBS

LONDON, Jan 22 (IFR) - A below-average performance in advisory dragged down UBS’s investment bank in the last quarter of 2017, with fees from M&A and related work falling 41% to just SFr143m (US$149m) from a year earlier.

The five US investment banks that have already issued fourth-quarter figures reported an average 6% rise in M&A fees in the three months to December 31.

This group also saw a 49% rise in equity capital markets fees and 19% increase in revenues from debt capital markets. UBS also struggled in these areas, seeing ECM revenues rise 12% to SFr229m and DCM up 10% at SFr188m.

“Our advisory business was below last year and suffering from the fact that the biggest part of activity [for the industry] was in North America but we are underweight there,” said chief executive Sergio Ermotti.

“We are more weighted in EMEA and Asia. We want to correct that in a sustainable way without rushing it,” he told analysts.

“This is a relative underperformance but at the end of the day we are very focused on advisory but without having to deploy balance sheet to undertake some mandates. We are very disciplined on that front.”

The bank, like others, was affected by the low volatility across financial markets. Revenues from FX, rates and credit fell 37% year-on-year to SFr262m. The group performed better in its traditionally strong equities franchise, showing a 1% rise to SFr900m.

US banks reported a 31% fall in FICC trading on average and a 7% drop in equities. The bank said that the low market volatility was “likely to persist in the short term, affecting institutional client activity levels in particular”.

UBS said that post the introduction of the new European Union regulation MiFID II on January 3, and the accounting standard IFRS15, it will have to report revenues accrued from selling research separately from executing deals. The bank is now billing clients after sending the research.

“Pre-MiFID II we bundled the whole, including soft dollars with brokerage fees accruing for research. In future as we unbundle them we will bill at the end of the period. It is a timing difference of around SFr50m revenues in equities,” said Kirt Gardner, chief financial officer.

Gardner said the bank was “cautiously optimistic” it could be a beneficiary of consolidation in this environment with a shrinking pool of revenues.

Ermotti set out a new three-year plan for the group, which leaves the targets for the investment bank largely untouched. It will still account for a third of the bank’s risk-weighted assets and leverage capacity and target a return on equity greater than 15%.

He said maintaining the investment bank was vital to support the group’s other activities, particularly its wealth management arm, which it has decided to unify in one global structure under co-presidents Martin Blessing and Tom Naratil.

Blessing, who will be responsible for EMEA, used to be CEO of Commerzbank, and Naratil, in charge of the Americas, was CFO before Gardner.

“Our corporate bank in Switzerland and wealth management business would not be what they are without the investment bank,” said Ermotti.

Overall for the full year the investment bank's revenues were down just 0.5% at SFr7.65bn, despite the weak fourth quarter, where they fell 14% to SFr1.73bn.

The group's annual pre-tax profits rose by 32% to SFr5.4bn, and booked a SFr2.87bn one-off charge relating to US tax law changes.

The core global wealth management business saw a 14% rise in annual pre-tax profits, adjusted for one-off charges, to SFr4.13bn. (Reporting by Christopher Spink)

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