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UBS reports second quarter net profit of CHF 1,974 million
Second best quarterly performance since 2000, with net profit up 28% from second quarter 2003 - Half-year net profit up 60% at CHF 4,397 million - Excluding goodwill and gain from the sale of US clearing business in 2003*, net profit in second quarter up 24%, and for the first half up 50% - Operating income up 6%, driven by strong fee and commission revenues - Annualized RoE at 26.5% (29.2% excluding goodwill), earnings per share up 37% (32% excluding goodwill and disposal gain in 2003) - Net new money of CHF 16.9 billion in total, with strong CHF 10.4 billion from wealth management clients worldwide.
% change from
Operating profit before tax and minority interest
UBS reports net profit of CHF 1,974 million in second quarter. This represents the second best quarterly performance since 2000, 19% lower than the record result achieved in first quarter. Compared to a year earlier, second quarter net profit rose 28% -- or 24%, once goodwill and the gain from the prior-year sale of the Correspondent Services Corporation (CSC) clearing subsidiary are excluded. For the first half of 2004, UBS records a net profit of CHF 4,397 million, up 60% from 2003 (up 50% excluding goodwill and the disposal gain).
After the very favorable business environment seen in first quarter 2004, the second quarter saw a slowdown in pace as equity investors became less active, and rising interest rates and low volatility drove volume out of the fixed income markets.
"Halfway through 2004, we can see that the markets' astonishing start to the year has settled into a more normal rhythm. In that context, this was a good quarter for UBS, demonstrating the importance of having the world's leading wealth management operation as a central part of our focused strategy," said Peter Wuffli, Chief Executive Officer.
"This quarter, strong asset-based fees from our wealth management and asset management franchises, alongside the progress of our corporate client franchise, have helped us to balance lower securities revenues," added Clive Standish, Chief Financial Officer.
Compared to second quarter a year earlier, operating income grew 6%. Fee and commission income was strong (up 12%), accounting for more than 50% of total revenues. The Investment Bank posted excellent results in its corporate advisory businesses as clients took advantage of strategic opportunities and favorable financing terms. Asset-based revenues in the wealth and asset management businesses were particularly good, with record levels of investment fund fees. In addition, the previously troubled private equity business posted another positive quarter.
Credit businesses benefited from the stable economic environment. UBS recorded a net recovery of CHF 131 million in the quarter, after net recoveries of CHF 3 million and CHF 1 million in first quarter 2004 and second quarter 2003, respectively.
The total level of invested assets rose 7% to CHF 2.2 trillion, driven by the year-on-year recovery in financial markets, as well as the CHF 85.7 billion inflow of net new money in the last 12 months. Inflows in second quarter totaled CHF 16.9 billion, with CHF 10.4 billion coming into the wealth management businesses.
Total operating expenses were up 2% in second quarter from a year earlier due to an increase in operational risk costs, among them the USD 100 million (CHF 128 million) penalty levied by the Federal Reserve Board related to the banknote trading business.
Headcount on 30 June 2004 was 66,043, up 114 from the beginning of the year. Staffing levels have increased in Europe, mainly due to the integration of acquired wealth management businesses in Germany and the UK.
In 2003, UBS's earnings deviated from their usual seasonality, with results weaker in the first half of the year than in the second. In contrast, the first quarter of this year saw excellent conditions, providing UBS with exceptional revenue opportunities. Such favorable combinations can't last -- opportunities have to be captured as they arise. However, UBS's diversified revenue mix helps the firm to perform strongly across varying market conditions. In second quarter, for instance, strong asset-based fees have helped to balance reduced securities revenues.
While investor sentiment has recovered from the very low levels of last year, it still remains subdued. Combined with directionless markets and the expectation of rising interest rates, this may continue to dampen levels of market activity.
"Since many of our businesses, especially our Investment Bank, have activity as an important driver, we should expect a return to a more normal seasonal pattern this year, with second half revenues not matching those in the first half," said Peter Wuffli.
Annualized return on equity for the first six months of 2004 was 26.5%, compared to 15.1% a year earlier. Basic earnings per share were CHF 1.85 in second quarter 2004, against CHF 1.35 in the same quarter a year earlier. The cost/income ratio was 73.7% in second quarter 2004, down from 75.6% a year earlier.
Performance against UBS financial targets
(pre-goodwill and adjusted for significant financial events)
UBS sets its financial targets and evaluates performance in terms of adjusted results, excluding significant financial events* and excluding the amortization of goodwill and other intangible assets.
UBS's performance against financial targets shows:
For the first six months of 2004, annualized return on equity was 29.2%, up from 17.8% in the same period a year ago and well above the target range of 15 to 20%. This reflects higher net profit combined with a lower average level of equity resulting from continued share buyback programs.
Basic earnings per share -- at their second highest level ever -- increased by 32% to CHF 2.06 in second quarter 2004 from CHF 1.56 a year ago, driven by the same factors as return on equity.
The cost/income ratio was 71.2%, an improvement from 74.2% in the same period last year, reflecting higher revenues in most businesses, especially wealth and asset management, as well as credit recoveries. This was partially offset by higher operational risk costs and provisions.
Year to date (annualized)
before goodwill and adjusted for significant financial events2
Basic EPS (CHF)
before goodwill and adjusted for significant financial events4
Cost / income ratio (%)
before goodwill and adjusted for significant financial events6
Net new money, wealth management units (CHF billion)7
Wealth Management USA
Wealth Management & Business Banking
The Wealth Management unit reported its best result since first quarter 2001. Pre-tax profit in second quarter 2004 was CHF 881 million, up 1% from first quarter 2004. Operating income was almost unchanged, as rising asset-based revenues compensated for the drop in transaction fees. Operating expenses declined despite continued investment in the domestic European business.
Gross margin on invested assets in second quarter was 104 basis points, down 3 basis points from first quarter, as client activity tailed off from a very high level. Net new money inflows totaled CHF 8.2 billion, down from the record inflow of CHF 16.2 billion in first quarter. The International Clients business reported CHF 7.1 billion, with another positive inflow of CHF 2.7 billion into our domestic European business and a continued strong performance in Asia. Net new money from Swiss clients was CHF 1.1 billion, unchanged from first quarter, reflecting a further quarter of successful client acquisition.
The Business Banking Switzerland unit reported a pre-tax profit of CHF 508 million, down CHF 2 million from first quarter. Operating income increased by CHF 16 million, reflecting an increase in account fees. This was partially offset by a decrease in interest income due to the declining recovery portfolio in the Swiss lending business. Operating expenses were 2% or CHF 18 million higher than in first quarter, as general and administrative expenses rose and fewer services were provided to other parts of the firm. This led to an increase in the cost/income ratio to 59.8% from 58.7% in first quarter.
Business Banking Switzerland's loan portfolio, at CHF 138.8 billion, was down CHF 1.1 billion from the level on 31 March 2004 due to the ongoing workout of recovery cases. Private clients took advantage of the low interest rates on offer, taking up net new mortgages of CHF 1.0 billion (CHF 0.3 billion higher than in first quarter).
Global Asset Management
The Global Asset Management business continues to perform well, with this quarter's result the second best since 2000. Pre-tax profit was CHF 131 million, down 9% from first quarter. Operating income, down 2%, decreased due to lower performance fees compared to a strong first quarter, offsetting higher income from the fund business.
In the Institutional business, net new money totaled CHF 7.6 billion. The alternative and quantitative investments business, with CHF 5.4 billion, continued to attract the largest inflows. This was followed by significant net new money inflows in equity and fixed income mandates, mainly in the UK and Asia Pacific.
In the Wholesale Intermediary business, net new money outflows were CHF 4.6 billion, including a CHF 8.3 billion drain in money market funds, which continued to be redirected into FDIC-insured deposits at UBS Bank USA. Excluding money market funds, there was an inflow of CHF 3.7 billion, particularly in new fixed income mandates and into newly launched absolute return funds.
Most funds show a strong relative performance over one-year, three-year, five-year and ten-year periods. Invested assets for the Business Group totaled CHF 595 billion on 30 June 2004, down from CHF 602 billion on 31 March 2004. The effect of strong net new money and positive investment performance was more than offset by the weakening of major currencies against the Swiss franc.
The Investment Bank recorded a pre-tax profit of CHF 923 million in second quarter 2004, down 8% from the same quarter last year. Revenues grew, but costs were affected by higher operational risk costs and provisions. Compared to the record first quarter 2004, pre-tax profit fell 45%, primarily reflecting lower investor activity.
Operating income was CHF 3,962 million in second quarter 2004, representing a 5% increase from a year earlier (decline of 20% from first quarter 2004).
Investment Banking revenues were up 15% from second quarter a year earlier (up 12% from first quarter 2004), driven by strong performance in the advisory business and syndicated finance. The growth was slightly offset by falls in debt and equity underwriting. Equities revenues were up 2% from second quarter 2003, reflecting increased client revenues in a slightly better environment than a year ago. Compared to first quarter 2004, income from the Equities business declined 19%, mainly reflecting lower proprietary trading revenues compared to the particularly strong first quarter. Fixed Income, Rates and Currencies revenues decreased 1% from a year earlier. Strong results in the Rates business were offset by a reduced contribution from principal finance. Fixed Income, Rates and Currencies revenues fell 23% from the record first quarter, reflecting lower market activity given the impact of rising interest rates and falling volatility. Performance in the Private Equity business continued to improve, with revenues of CHF 52 million in second quarter 2004 against negative CHF 57 million a year ago, as improved market conditions allowed a number of successful divestments and a lower level of writedowns.
Total operating expenses rose 10% from a year earlier (down 7% compared to first quarter 2004). Whilst underlying running expenses were flat, operational risk costs, including the penalty related to the banknote business and provisions covering an estimate for additional US withholding tax costs, pushed up this quarter's general and administrative expenses.
Wealth Management USA
In second quarter 2004, the Wealth Management USA business recorded a pre-tax profit of CHF 16 million, down from CHF 43 million in first quarter. Before acquisition costs (goodwill and intangible asset amortization, net goodwill funding costs and retention payments), pre-tax profit fell 14% to CHF 188 million from CHF 218 million in first quarter.
The fall in performance mainly reflects lower transactional revenues. Average daily trading volumes fell 10% in second quarter from the relatively strong first quarter, as investor activity slowed. This negative effect was partially offset by increased lending revenues and a record volume of recurring fees. In addition, Municipal Finance income increased by 16% on improved secondary trading performance and new issue underwriting.
Costs continued to be tightly managed. Operating expenses were down 3% from first quarter, mainly driven by lower performance-related compensation and reduced retention payments. This is the last quarter for which merger-related retention expenses will be incurred.
The inflow of net new money was CHF 2.2 billion in second quarter 2004. Muted levels of investor confidence, particularly at the start of the quarter, continued to perceptibly affect the US market. Although inflows decreased from the CHF 2.8 billion achieved in first quarter, the result compares favorably to US peers.
Zurich / Basel, 10 August 2004
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