UBS reports first quarter net profit of CHF 1,214 million
UBS reports net profit of CHF 1,214 million in first quarter 2003, down 11% from the same quarter a year earlier. Before goodwill and excluding the net gain from the sale of Hyposwiss in first quarter 2002, net profit was 7% lower. Despite tough markets, UBS managed to increase shareholder returns by keeping a strong grip on costs and managing capital resources tightly. UBS's wealth management businesses (Private Banking and UBS PaineWebber) achieved strong net new money inflows of CHF 11.1 billion, with a record inflow into the European wealth management initiative.
UBS reports net profit of CHF 1,214 million, a decline of 11% from the first quarter a year earlier. Before goodwill and excluding the gain from the sale of Hyposwiss in first quarter 2002*, net profit was 7% lower. This decrease is almost entirely attributable to currency moves - mainly the US dollar's 20% weakening against the Swiss franc between the two periods.
Compared to fourth quarter 2002 and before goodwill, net profit rose 35% after excluding the writedown related to the withdrawal of the PaineWebber brand** and the gain from the sale of Klinik Hirslanden***.
"UBS has again delivered robust results in a tough environment. We focused on protecting and enhancing returns for our shareholders. We pushed down our cost/income ratio to its lowest level since the middle of 2001, and delivered a higher return on equity than this time last year," said Peter Wuffli, President of the Group Executive Board.
About half of the change in both income and expense compared to the same quarter a year earlier was driven by currency movements.
Operating income declined 19% compared to a year earlier. Adjusted for the gain from the sale of Hyposwiss1, income was 18% lower. Apart from the currency effects, the decrease was mainly due to poor equities trading conditions and low equity market levels, affecting asset-based revenues. Encouragingly, private equity writedowns at UBS Capital returned to more moderate levels, decreasing to CHF 123 million in first quarter 2003 from CHF 383 million in the same quarter a year earlier. Fixed income trading revenues were very strong, reflecting a buoyant trading environment that benefited from low interest rates and a steep yield curve.
Credit businesses again proved resilient, despite another quarter of generally weak economic conditions. Actual net credit loss expense during the quarter amounted to CHF 104 million compared to CHF 85 million in the same quarter in 2002.
Costs remained under tight control. Operating expenses fell 20% from the same quarter a year earlier, to their lowest level since the merger with PaineWebber. Besides currency effects, the decrease reflects sharp declines in personnel and in general and administrative expenses, down 21% and 18% respectively. Performance-related compensation also fell.
Headcount declined a further 666 to 68,395 in the three months since 31 December 2002 as processes and structures were streamlined. At the same time, capabilities were selectively expanded in areas with growth potential.
Net new money in UBS's wealth management businesses (Private Banking and UBS PaineWebber) for the quarter was CHF 11.1 billion - a strong result that shows the continued confidence clients place in UBS's financial advice, its stability and strength. In the European wealth management business, net inflows reached a record of CHF 3.0 billion. Inflows were positive across all private banking markets. In the US, UBS PaineWebber reported net new money of CHF 3.7 billion, comparing favorably to industry experience.
Merger of Cantrade, Bank Ehinger and Armand von Ernst
On 18 February 2003, UBS announced the creation of a holding company for its five fully owned independent private banking subsidiaries and GAM, its specialist asset manager.
The three Swiss-German private banking subsidiaries (Berne-based Armand von Ernst, Basel's Bank Ehinger and Zurich's Cantrade) are now merging under the name Ehinger & Armand von Ernst. The merger is legally retroactive to 1 January 2003 and full operational integration of the three banks is expected to be complete by 1 January 2004. The new bank, headquartered in Zurich, with branches in Basel and Berne, will be one of the most important providers of private banking services in the Swiss-German speaking regions of Switzerland.
GAM, Ferrier Lullin in Geneva and Banco di Lugano are not affected by the merger and will continue to service their clients under their present brands.
Markets and trading conditions are tough and will likely remain so.
"While some further degree of volatility cannot be excluded, we do feel that the downward pressure on our industry from the business and market environment could be beginning to ease and that the worst earnings declines may be behind us," Peter Wuffli said. "Our businesses are proving highly competitive and we remain convinced that our strategy is the right one."
Although the timing of a return to sustained revenue growth is hard to predict, UBS is still in a position to protect and enhance shareholder returns by flexing costs and tightly managing capital. At the same time, because of its successful strategic initiatives, UBS continues to be well placed to profit from growth opportunities as they arise.
Financial ratios as reported
Annualized return on equity in first quarter 2003 was 13.2%, compared to 12.3% a year earlier. Basic earnings per share were CHF 1.05 in first quarter, against CHF 1.10 in the same quarter a year earlier. The cost/income ratio was 78.4% in first quarter 2003, down from 80.1% a year earlier.
Performance against Group financial targets
(pre-goodwill and adjusted for significant financial events****)
UBS management sets the Group's financial targets and evaluates performance in terms of adjusted results, excluding significant financial events and the amortization of goodwill and other intangibles. On that basis, UBS's performance against financial targets shows:
The Group's annualized return on equity for first quarter 2003 was 15.8%, up from 15.2% in the same quarter a year ago and back within our target range of 15-20%. The ongoing reduction of equity through share buyback programs more than offset the market-related decline in earnings.
Basic earnings per share in first quarter 2003 were CHF 1.26, just below CHF 1.27 in the same quarter last year. The 7% decline in profit was again offset by the reduced average number of shares outstanding, driven by ongoing share buyback programs.
The cost/income ratio this quarter was 75.3%, a decrease from 77.9% in first quarter last year and the lowest since second quarter 2001, as tight cost control complemented the fall in private equity writedowns.
Results from the Business Groups
UBS Wealth Management & Business Banking
Private Banking's pre-tax profit in first quarter 2003 was CHF 534 million, up 7% from fourth quarter 2002, as performance benefited from lower running costs. Net new money in first quarter 2003 was CHF 7.4 billion, up from CHF 2.8 billion in the previous quarter, the third strongest quarter since 2000. Private Banking - International Clients reported CHF 7.0 billion in net new money, with a record inflow into the European wealth management initiative. The gross margin on invested assets increased slightly to 98 basis points in first quarter from 97 basis points in fourth quarter 2002.
Business Banking Switzerland reported its third-highest quarterly pre-tax profit ever, CHF 499 million, a 10% increase from fourth quarter 2002. Revenues rose slightly due to higher interest income, while costs fell to a record low, mainly due to lower depreciation and personnel expenses. Actual credit loss expense amounted to CHF 64 million in first quarter, on par with the CHF 60 million in fourth quarter. The relatively low level of credit losses in Switzerland despite a deteriorating economic climate reflects the results of UBS's efforts to improve the quality of the domestic credit portfolio. Helped by growth in the Swiss residential mortgage lending business, the loan book of UBS Wealth Management & Business Banking increased by CHF 2.9 billion or 1.7% between 31 December 2002 and 31 March 2003.
UBS Global Asset Management
Pre-tax profit for first quarter 2003 was CHF 44 million, an increase of 29% from fourth quarter 2002. This was the result of lower operating expenses, down mainly because the fourth quarter 2002 result included severance costs and expenses for unoccupied premises. Partially offsetting the falling operating expenses were a decline in institutional performance fees and lower revenues at O'Connor.
In the Institutional business, net new money totaled CHF 3.9 billion in first quarter 2003, compared to CHF 2.4 billion in fourth quarter 2002. Equity mandates experienced strong inflows globally. In its Wholesale Intermediary fund business, UBS Global Asset Management recorded a net inflow of CHF 3.4 billion in first quarter 2003, compared to negative CHF 0.8 billion in fourth quarter 2002.
Invested assets for UBS Global Asset Management totaled CHF 519 billion at 31 March 2003 (CHF 533 billion at 31 December 2002). Most of UBS Global Asset Management's funds continued to show a strong relative investment performance over 1-year, 3-year and 5-year periods.
UBS Warburg's Corporate and Institutional Clients business unit recorded a pre-tax profit of CHF 894 million in first quarter 2003, down 6% from the same period last year, but 72% higher than fourth quarter 2002. The decrease from last year was largely due to currency movements, with the US dollar falling 20% against the Swiss franc in the period.
Income was CHF 3,341 million in first quarter, down 20% from the same quarter last year, but up 17% from fourth quarter 2002. The Fixed Income, Rates and Currencies business reported its best performance since 1999, rising 4% from a year earlier and up 100% from the last quarter. The revenues in this business are mostly denominated in US dollars - and results would have been even more favorable without the negative impact of the falling US dollar. Investment Banking revenues decreased 44% from the same quarter last year due to the negative impact of market and economic conditions on the corporate client fee pool. Income from the Equities business also declined 45% compared to a year ago due to lower market activity affecting trading opportunities as well as lower proprietary trading revenues. Client commissions held steady.
In contrast to general market trends, UBS Warburg continued to weather the difficult credit environment well, with few new impairments this quarter. The non-performing loans to gross loan ratio was almost steady at 1.7% in first quarter 2003 against 1.6% in fourth quarter 2002.
Operating expenses in first quarter 2003 dropped by 24% from first quarter 2002 but increased 4% from the previous quarter. The compensation ratio fell to 54% for the quarter, compared to 55% for the full year 2002. The elasticity of this unit's cost base allows UBS Warburg to closely manage expenses in line with revenues.
UBS Capital recorded a pre-tax loss of CHF 90 million in first quarter 2003. This compares favorably to pre-tax losses of CHF 362 million in fourth quarter 2002 and CHF 462 million in first quarter 2002, mainly a reflection of lower writedowns. Unfunded commitments fell from CHF 2.1 billion on 31 December 2002 to CHF 1.9 billion on 31 March 2003.
UBS Capital will continue to focus on managing existing assets in order to maximize value. It will also pursue opportunities to reduce undrawn capital commitments.
Prevailing economic conditions, however, will continue to determine UBS Capital's financial performance, with its results expected to remain volatile due to the unpredictability of exit opportunities. However, there are signs that the remaining portfolio is trending towards a performance more in line with overall equity markets.
Despite continued investor pessimism, with sentiment at a historic low in first quarter, UBS PaineWebber posted a solid performance and achieved strong net new money of CHF 3.7 billion, demonstrating its competitive strength.
Including acquisition costs, UBS PaineWebber reported a pre-tax loss of CHF 95 million, compared to a loss of CHF 1,368 million in fourth quarter 2002 when the withdrawal of the PaineWebber brand required an amortization expense of CHF 1,234 million. Excluding the writedown and other acquisition costs (goodwill amortization, net funding costs and retention payments), the Business Group posted a pre-tax operating profit of CHF 120 million, down from CHF 142 million in fourth quarter 2002.
Since UBS PaineWebber's transactions are primarily denominated in US dollars, comparisons of its results to prior periods are affected by the decline of the US dollar against the Swiss franc. In US dollar terms, performance before tax and acquisition costs was 10% lower than in fourth quarter 2002, reflecting essentially flat revenues but slightly higher personnel expenses.
Zurich / Basel, 13 May 2003