UBS reports third quarter net profit of CHF 1,673 million
With third quarter 2003 net profit of CHF 1,673 million, UBS reports its most profitable quarter in three years. Excluding goodwill amortization, net profit was CHF 1,911 million, up 53% from a year earlier and 2% higher than second quarter. Net new money of CHF 20 billion demonstrates substantial competitive gains. Return on equity for the year has risen to almost 20%.
UBS reports net profit of CHF 1,673 million for third quarter 2003. Excluding goodwill amortization, net profit was CHF 1,911 million, up 53% from a year earlier and 2% higher than second quarter.
"It is our most profitable quarter in three years, with performance up in all our businesses compared to last year. We captured revenue opportunities despite volatile markets, particularly in fixed income, while the strong net new money inflow again shows our substantial competitive progress," said Peter Wuffli, Chief Executive Officer.
In third quarter, clients brought CHF 20 billion in net new assets to UBS. In institutional asset management, UBS recorded an inflow of CHF 6.3 billion, the highest since 2000. The wealth management businesses posted total net inflows of CHF 15.1 billion; in the US, UBS reported a very strong inflow of CHF 5.7 billion, again outperforming most peers in the private client market. The European wealth management business put in another outstanding performance, reporting strong net new money of CHF 2.8 billion and a 57% year on year rise in revenues.
Operating income was CHF 8,490 million in third quarter 2003, up 6% from the same period a year earlier, benefiting from improved fee and commission income. Corporate finance fees increased, reflecting a pick-up in corporate activity as well as a strengthening of UBS's competitive position. Asset-based and investment fund fees rose on the recovery in equity markets. Revenues in the Fixed Income, Rates and Currencies business remained very strong, despite turbulent bond markets in the summer, highlighting the broad base of this business. Compared to third quarter 2002, private equity writedowns fell significantly.
Costs remained under tight control and were cut in almost all areas, pushing the overall pre-goodwill cost/income ratio to 72.2%, its lowest level since PaineWebber became part of UBS in 2000. Including goodwill amortization, the cost/income ratio was 75.1%. Total operating expenses fell 6% to CHF 6,353 million, with general and administrative expenses down 17%. Personal expenses fell 1%, because of lower salaries, which reflected a decrease in staff levels.
Headcount, at 66,153 on 30 September 2003, was 4% lower than at the beginning of the year. Lean structures and careful management of resources will continue to be crucial success factors in the financial services industry, and so UBS expects to further streamline processes across the firm and reduce corresponding staff levels.
Both the international and Swiss credit portfolios outperformed, with UBS realizing a net recovery of CHF 26 million in third quarter 2003, compared to a net credit loss expense of CHF 95 million a year ago. This positive development was largely due to a consistent level of recoveries and the small number of new impairments.
Employee stock options - grants in 2003 and strategy for future use
UBS recently reviewed the use of stock options in its compensation schemes and concluded that the targeted use of options as an element of the overall compensation strategy gives employees an appropriate long-term incentive to pursue sustainable share price appreciation. Consequently, UBS will continue to make use of options, but will grant them more selectively than before. From 2004 onwards, options will be used solely to match voluntary investments in UBS shares or as targeted discretionary incentives to top performers who make key contributions to the firm's success. As a result of these changes, the number and value of employee stock options awarded are likely to decrease from current levels for grants made in 2004 and thereafter.
As part of its quarterly results discussion from now on, UBS will disclose the pro-forma expense for option awards, net of tax, which would have been incurred if recorded at fair value. In the first nine months of 2003, this expense was CHF 426 million, down from CHF 658 million for the same period a year ago, with the drop mainly attributable to lower prices for the UBS share at grant. Most employee stock options are awarded in the first half of the year, and significant grants are not expected for the remainder of this year. The final value of options awarded in 2003 will be disclosed in UBS's fourth quarter 2003 report.
Throughout the year, market conditions have fluctuated, with trading opportunities shifting from one area to another. UBS has proven to be well positioned to capture those opportunities at the right times. Its diversified revenue mix - with a stable core of wealth and asset management income - helped contain market-driven volatility. Underlying these fluctuations, however, global economies and market conditions have been gradually improving.
"The stronger and more certain the recovery proves, the more positive the effect on our revenues. Our successful track record in delivering consistently excellent results across different market challenges and environments gives us confidence that UBS will continue to offer first-class shareholder returns," Peter Wuffli said.
Financial ratios as reported
Annualized return on equity for the first nine months of 2003 was 16.9%, compared to 11.8% a year earlier. Basic earnings per share were CHF 1.52 in third quarter, against CHF 0.79 in the same quarter a year earlier. The cost/income ratio was 75.1% in third quarter, against 83.9% in the same quarter a year earlier.
Performance against UBS financial targets
(pre-goodwill and adjusted for significant financial results)
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.
On that basis, UBS's performance against financial targets shows:
Annualized return on equity for the first nine months was 19.5% - its highest level since 2000, up from 14.6% in the same period a year ago and close to the top of UBS's target range of 15-20%. The increase reflects improving net profit combined with a lower average level of equity due to continued buyback programs
Basic earnings per share - at their third highest level ever - increased by 66% to CHF 1.73 in third quarter 2003 from CHF 1.04 a year ago, driven by the same factors as return on equity
The cost/income ratio was 72.2% in third quarter 2003, an improvement from 80.1% reported a year earlier. This drop pushes the ratio down to its lowest level since the merger with PaineWebber, with improvements seen in all Business Groups compared to a year ago.
Results from the Business Groups
Wealth Management & Business Banking
Wealth Management's pre-tax profit in third quarter 2003 was CHF 714 million, up 9% from second quarter. Despite the second quarter disposal gains from the sale of a participation in Deutsche Börse, operating income increased on rising fee-based revenues as a result of a higher average asset base and recovering client activity levels. The cost/income ratio improved to 59% this quarter from 62% in second quarter. Before goodwill, the ratio stood at 58% and 61% respectively, reflecting stringent cost control measures. Net new money was CHF 9.4 billion, up from CHF 6.5 billion in the previous quarter. It was the highest quarterly inflow ever recorded, with investments mainly from international clients. The European wealth management business reported excellent inflows of CHF 2.8 billion, bolstered by strong performances in the UK and Germany. For the first nine months of 2003, net new money inflows in this business totaled CHF 9.1 billion, corresponding to an annualized growth rate of 43%.
Business Banking Switzerland achieved another good result in third quarter. Pre-tax profit was CHF 528 million, 9% below the second quarter figure. Ignoring last quarter's divestment gains of around CHF 80 million, underlying profit would have risen from second quarter. Operating income benefited from higher fee income and lower credit loss expense. Operating expenses decreased 2%, reflecting falls in depreciation and personnel expenses.
In Switzerland, UBS's total headcount for all Business Groups on 30 September 2003 was 26,901, down 4% from the beginning of the year. The saturation in Switzerland's market for financial services will continue to present a challenge that will demand the most efficient structures and processes. As productivity gains in domestic banking are primarily achievable by progressively automating processes in support areas, headcount is expected to keep declining at the same rate for the remainder of the year and into 2004.
Global Asset Management
Pre-tax profit for third quarter at Global Asset Management was CHF 87 million, a decrease of 2% from second quarter. Revenues rose on positive market developments and higher performance fees, but they were offset by increased general and administrative as well as personnel expenses, reflecting higher incentive-based compensation.
In the Institutional business, net new money was CHF 6.3 billion, up from CHF 1.1 billion in second quarter with the gain reflecting inflows into alternative investments, equities and asset allocation mandates. In its Wholesale Intermediary fund business, Global Asset Management recorded a net outflow of CHF 1.4 billion, compared to inflows of CHF 1.3 billion in the previous quarter. This was entirely attributable to outflows in money market funds as performance in the core business remained resilient with strong inflows in fixed income mandates.
The Investment Banking & Securities business unit recorded a pre-tax profit of CHF 965 million, up 35% from a year earlier but 9% lower than the exceptionally strong second quarter. Income was CHF 3,486 million, up 7% from the same quarter last year but down 10% from second quarter 2003. In investment banking, advisory revenues improved significantly from third quarter 2002. Equity finance and clearing revenues increased, and are expected to be further strengthened by the acquisition of ABN AMRO's prime brokerage business, which will take effect in fourth quarter. Client commissions in the Equities business remained robust and were up on third quarter 2002. The Fixed Income, Rates and Currencies business delivered strong results despite market turbulence, with revenues up 30% on a year earlier. This strong result was achieved despite negative revenues of CHF 192 million related to credit default swaps hedging credit exposures in the loan book, compared to a gain of CHF 321 million a year earlier.
Operating expenses in third quarter 2003 were CHF 2,509 million, largely unchanged from a year earlier. Personnel expenses rose 3% as a result of higher incentive-based compensation, although that was partially offset by lower salaries. The cost/income ratio was 72% in third quarter 2003. Excluding goodwill amortization, it was 70%, down from 74% in the same period a year earlier. Headcount fell 4% from the start of the year, reflecting reductions in investment banking and logistics.
Private Equity recorded a pre-tax loss of CHF 74 million in third quarter 2003 - a marked improvement from the CHF 418 million loss a year earlier, reflecting significantly lower levels of writedowns. Improving valuations led to an increase in unrealized gains.
Wealth Management USA
Investors in the US were generally optimistic about economic and financial markets in third quarter, although latent concerns about inflation moderated their outlook.
Including acquisition costs (goodwill amortization, net goodwill funding and retention payments), Wealth Management USA's pre-tax loss was CHF 43 million. Excluding acquisition costs and the gain realized in second quarter from the disposal of the CSC clearing business**, pre-tax profit decreased 12% to CHF 170 million from CHF 193 million in second quarter.
Since Wealth Management USA's transactions are primarily denominated in US dollars, the movements of the US dollar against the Swiss franc affect comparisons of its results to prior periods. In US dollar terms, performance before acquisition costs and excluding last quarter's disposal gain was 13% lower than the record US dollar performance achieved in second quarter, which reflects an industry-wide decline in municipal securities activity. In the private clients business, performance remained strong, with recurring fees in US dollar terms at their highest level since PaineWebber became part of UBS. The cost/income ratio was 103% in third quarter. Excluding acquisition costs and the gain from the sale of CSC in second quarter, the ratio increased to 87% in third quarter from 86% in second quarter. The inflow of net new money in third quarter was a strong CHF 5.7 billion, significantly higher than the CHF 3.9 billion reported in second quarter.
Zurich / Basel, 11 November 2003