UBS results for first nine months of 1999 - Net profit after tax over CHF 5 billion
UBS earned a Group pre-tax profit of CHF 6,826 million for the first nine months. Net profit after tax and minority interests increased to CHF 5,179 million, representing diluted earnings per share of CHF 24.73 and an annualized return on equity of 19.5%. These results are not directly comparable with the same period last year. Group assets under management grew 2% since year-end 1998 to CHF 1,607 billion. Given the strength of the figures for the first nine months, UBS is confident about the result for full-year 1999.
UBS reports a Group pre-tax profit of CHF 6,826 million for the nine-month period, compared to CHF 3,465 million in the same period last year. Total operating income increased by 31% to CHF 21,763 million, while total operating expenses were up 14% to CHF 14,937 million. The cost-income ratio improved from 77% to 65.9%.
The Group accounts contain total pre-tax gains of CHF 1,826 million (CHF 1,478 million after tax), almost all of which stem from the sale of the 25% stake in Swiss Life/Rentenanstalt, the divestment of Bank Julius Baer registered shares and the disposal of the bank's Global Trade Finance operations outside Switzerland. The result does not reflect the announced acquisition of Global Asset Management (GAM) or that of Allegis Realty Investors LLC.
Assets under management
During the nine-month period, assets under management increased 6% in Private Banking and 2% for the Group as a whole. Assets under management will also be positively influenced by the announced acquisition of GAM and the continued integration of the international private banking business of Bank of America.
The Private Banking Division reported pre-tax profits of CHF 2,023 million for the first nine months of 1999. On a comparable basis - i.e. adjusted for the impact of the sale of subsidiaries - pre-tax profit for the equivalent 1998 period was CHF 2,656 million. The overall performance of the Private Banking Division was negatively affected by lower levels of client transaction activity as well as significant investments in the expansion of domestic private banking outside Switzerland.
Assets under management grew 6% since year-end 1998 to CHF 642 billion. They were down 2.6% compared to the second quarter of 1999, mainly due to investment performance. The integration of Bank of America's international private banking activities in Europe and Asia proceeded as planned, and client assets in the amount of CHF 3.7 billion have been transferred to UBS to date.
In a further step to grow the domestic and international private banking business, UBS in September announced the acquisition of GAM , a leading asset management group with client assets of CHF 21 billion (at mid-year 1999). GAM focuses on private clients' portfolios and mutual funds. GAM's multi-manager system selects the top 90 out of 6,000 third-party fund providers. As a result, UBS Private Banking will be in a position to offer third-party funds that meet the bank's high standards and broaden the range of investment styles.
The Warburg Dillon Read Division continued to perform strongly despite less favourable market conditions during the third quarter. The Equities business area continued to perform extremely well across all markets. The Fixed Income business area also substantially exceeded expectations, with particular strengths in swaps and options, and investment grade debt. Treasury business was adversely affected by low volumes and low volatility in the foreign exchange markets. Corporate client advisory business and primary equities transactions picked up significantly in the third quarter and resulted in improvements to league table positions, especially for primary equity and mergers and acquisitions. In particular, Warburg Dillon Read was selected to act as the sole advisor to Sprint in their proposed USD 129 billion merger with MCI WorldCom.
During the first nine months of 1999, Warburg Dillon Read recorded pre-tax profits of CHF 2,077 million, a result that significantly exceeded expectations. The rise in costs was partly due to the fact that in the third quarter of 1998 additional personnel payments were charged against the restructuring provision as part of the bank's efforts to protect the investment banking franchise in the face of merger-related shortfalls in profits. At the same time, performance-related compensation increased, reflecting good results. Salaries, however, fell due to headcount reductions.
The Private and Corporate Clients Division reported a pre-tax profit of CHF 841 million. Operating income climbed 6% mainly due to improved interest margins, while costs increased just 4%. Furthermore, the result was positively influenced by the development of the Affluent Clients business. Assets under management decreased by 2% from year-end 1998 to CHF 427 billion. This is almost entirely due to movements in banks' transaction accounts, which are naturally volatile and do not represent a core element of assets under management. Excluding these particular assets, PCC Division's assets under management increased 3% or CHF 12 billion.
Now that the integration process has been successfully completed, the Private and Corporate Clients Division can refocus efforts on developing its business. As part of a modern, multi-channel strategy, UBS has significantly extended its 24-hour Banking offerings. UBS Tradepac offers a powerful and low-cost product designed for active trading clients who do not need advisory services. The package includes online access to six stock exchanges in Switzerland and abroad and provides real-time Swiss market prices. The existing Internet banking product has also been enhanced with attractive additional services such as the exclusive link to the top-of-the-line personal financial management software UBS Quicken.
UBS Brinson posted a pre-tax profit of CHF 236 million. The result was impacted by merger-related client defections, investment performance issues and an increase in goodwill expense related to the buy-out of the former Japanese joint venture with Long Term Credit Bank. Assets under management were up slightly from the end-1998 level at CHF 538 billion. The reduction in the third quarter is attributable to investment performance and client attrition.
In September, UBS Brinson announced an agreement to acquire Allegis Realty Investors LLC, one of the largest independent real estate investment management firms in the United States, thus enabling the division to expand its existing real estate capabilities and broaden real estate investment services for clients.
UBS Capital, which specializes in private equity investment, reported pre-tax profits of CHF 138 million. The lower level of disposals compared with the same period last year is according to plan and the ageing of the portfolio. Costs remained in line with expectations. The current book value of the private equity portfolio is CHF 2.4 billion, compared with CHF 1.8 billion at the end of 1998. By mid-1999, the market value had risen from CHF 2.7 billion (end-1998) to CHF 3.5 billion. This resulted in an increase in unrealized gains of CHF 0.2 billion to CHF 1.1 billion.
One of UBS Capital's significant divestments in the third quarter was the sale of its stake in Gardaland SpA in Italy, one of Europe's leading theme parks. During UBS Capital's investment period in the theme park, Gardaland's sales grew by 50% and its earnings by 65% before interest and tax.
Closer linkages between UBS Capital and the Private Banking and Warburg Dillon Read Divisions are already bringing tangible benefits.
Results from the Group financial accounts
Total operating income for the first nine months of 1999 rose to CHF 21,763 million, up 31% on the same period last year. This increase is attributable, on the one hand, to higher gains on divestments this year than during the previous period. On the other hand, revenues during the previous period were negatively impacted by market turmoil, especially in emerging markets, as well as revenue losses from investments in Long Term Capital Management (LTCM) and the Global Equity Derivatives portfolio. The increase in operating income also reflects the Group's strong market position.
Net interest income before credit loss expense remained effectively flat with a 2% decrease to CHF 4,837 million compared to nine-month 1998. Higher interest margins resulting from increased implementation of risk-adjusted pricing in the domestic loan portfolio were more than offset by the sale of activities which had contributed to net interest income in nine-month 1998, as well as the impact of lower returns on invested equity and the reduction of the international loan portfolio. Credit loss expense for the first nine months was CHF 910 million. During 1998 a significant portion of the credit losses was appropriately charged to previously established provisions, thus reducing the total expense at September 1998 to CHF 464 million.
The quality of the loan portfolio has improved further. Non-performing loans stood at CHF 13.2 billion at the end of September 1999, compared to CHF 15.7 billion at year-end 1998.
Net fee and commission income decreased by 5% to CHF 9,250 million, due partially to the divestment of subsidiaries and the associated reduction in income. There was a strong increase in custodian fees. Brokerage fees were down period-on-period due to lower client activity and the inclusion of divestment-related income in nine-month 1998 no longer being reflected in 1999 figures. Despite robust growth in corporate finance fees, underwriting and other management and advisory fees were down relative to an exceptionally strong first nine months of 1998.
Net trading income was CHF 6,013 million, compared to CHF 598 million in the first nine months of 1998, which was negatively impacted by the write-downs on the investments in Long Term Capital Management (LTCM) and Global Equity Derivatives positions. The good conditions in financial markets during the nine-month period led to higher volumes in secondary trading for clients and to increased revenues from equities. Fixed-income trading revenues performed well across all major products. Income from foreign exchange and bank note trading was down period-on-period, mostly as a result of lower volumes and volatility in the foreign exchange markets.
Other income, including income from associates, was up 41% to CHF 2,573 million. This reflects disposal-related pre-tax gains of CHF 1,800 million. In the first nine months of 1998, the disposal-related pre-tax gains of CHF 1,058 million were partially offset by the CHF 370 million portion of the LTCM write-down.
Operating expenses were 14% higher than a year earlier at CHF 14,937 million. Personnel expenses grew by 38% to CHF 9,923 million during the period. Much of this substantial increase is attributable to the fact that in 1998 additional personnel payments were charged against the restructuring provision as part of the bank's efforts to protect the investment banking franchise in the face of merger-related shortfalls in profits. Adjusting the prior-year period for this CHF 1,007 million, personnel expenses in the first nine months of 1999 increased by 21%.This is directly attributable to higher nine-month performance-related compensation based on the good investment banking result in 1999. Group headcount has risen by 612 to 48,623 since the end of last year primarily due to the expansion of domestic private banking operations outside Switzerland. General and administrative expenses decreased by 19%. Excluding the impact of the CHF 570 million provision in the prior-year period for the class action settlement in the US, the decline was 8%, reflecting stringent cost reduction programmes. Depreciation and amortization costs were 4% lower at CHF 1,290 million.
Of the CHF 7 billion merger-related restructuring provision booked in 1997, a total of CHF 5,430 million has been utilized since the beginning of 1998. Of this total, CHF 1,403 million was utilized in the first nine months of 1999 to cover costs relating to IT integration, premises and personnel.
With regard to Y2K compliance, the upgrading of all critical IT systems and infrastructure has been fully tested and was completed on schedule by the end of September. The remediation costs amounted to CHF 222 million in the nine-month period to end-September. For the year as a whole, UBS expects total costs of CHF 302 million.
As a global integrated investment services firm, UBS has the ideal strategic focus and mix of businesses to successfully position itself in the market. Given the strength of the figures for the first three quarters, UBS is confident about the results for full-year 1999.
Zurich/Basel, 23 November 1999