UBS reports second quarter net profit of CHF 1,331 million
UBS reports net profit after tax in second quarter 2002 of CHF 1,331 million, down 4% from the second quarter a year earlier and 2% lower than in the first quarter. Pre-goodwill, profit was 5% less than second quarter 2001, but up 4% from the first quarter's pre-goodwill result (adjusted for the disposal of Hyposwiss). Profitability was sustained through strict management of costs, offsetting the market-related decline in revenues. Credit loss expense fell, reflecting the Group's cautious attitude towards risk concentrations.
UBS achieved second quarter 2002 net profit after tax of CHF 1,331 million, down 4% from the second quarter a year earlier and 2% lower than in the first quarter of 2002. Pre-goodwill, profit was CHF 1,633 million, 5% less than the second quarter 2001, but up 4% from first quarter 2002 (adjusted for the disposal of Hyposwiss) -- the third consecutive quarterly increase.
During the quarter, extensive uncertainty about global economic prospects continued to challenge the financial industry. In particular, investor confidence was undermined by a succession of negative events, leading to considerable corrections in equity markets.
"Against this difficult background, profitability in our key businesses has proved resilient. We have been able to limit negative credit experience and offset the pressure on revenues with strict cost management," said Peter Wuffli, President of the Group Executive Board.
Revenues from the private client businesses held up particularly well. Nevertheless, total operating income, at CHF 9,008 million, fell 9% from a year earlier and was 6% lower than in the first quarter of this year, reflecting generally subdued levels of corporate activity and depressed investor sentiment as well as further writedowns on UBS Capital's private equity investments. UBS Capital continued to record disappointing losses through deteriorating valuations and a shortage of viable exit opportunities.
Cost discipline in all UBS businesses helped keep expenses down. Total operating expenses in second quarter dropped 9% from the same period in 2001 and personnel expenses fell 10% compared to both second quarter 2001 and first quarter 2002.
UBS's cautious attitude towards risk has helped it avoid exposure from the worst of the financial market's recent defaults. Credit losses declined to CHF 37 million in the second quarter compared to CHF 76 million for the same period in 2001, despite a generally deteriorating credit environment. Levels of impaired loans fell to CHF 12.6 billion, down 9% from the first quarter.
The current environment highlights the importance of a solid and stable financial structure. UBS's capital base and cash generation remain strong, with a BIS Tier 1 ratio of 11.8% among the highest in the industry. This financial strength allowed continued share repurchases (CHF 2.3 billion in the second quarter), supporting the level of earnings per share.
Net new money in the private clients businesses was CHF 4.9 billion in second quarter 2002. Private Banking showed a strong net inflow of CHF 3.5 billion despite a CHF 3.8 billion net outflow due to the Italian tax amnesty. As in the first quarter, UBS managed to retain almost half of the flowback to Italy within its domestic private banking operations. In an extremely difficult environment in the US private client market, UBS PaineWebber continued to attract new money with a net inflow of CHF 1.4 billion.
UBS's two major strategic initiatives continue to enjoy success. The European wealth management initiative, experiencing its highest revenues since its inception, continues to expand its franchise. UBS Warburg further improved its share of the US investment banking market to 3.7% from 3.4% a year ago.
Performance against Group financial targets:
Pre-goodwill and adjusted for the one-off gain from the sale of Hyposwiss in first quarter 2002:
Annualized return on equity for the first half 2002 was 15.6%, within the target range of 15-20%, but down from 16.8% a year ago.
Basic earnings per share in second quarter 2002 were CHF 1.33, a decline of only 3% from the same quarter last year and 7% higher than the average in 2001.
The cost/income ratio declined to 77.0% from 77.2% in the second quarter last year, evidence of continued cost control across all businesses. The cost/income ratio was also at the lowest level this quarter since the first quarter of 2001.
UBS financial results have remained strong, with its diverse range of businesses, its avoidance of risk concentration and its cost elasticity being the critical factors driving performance.
Prospects for a meaningful global economic recovery in the latter part of the year have receded. The equity market turbulence of recent weeks may also result in further damage to investor confidence. Therefore, UBS does not expect full-year results in 2002 to reach those of 2001.
Results of the business groups
(adjusted for significant financial events 1)
The Private and Corporate Clients business unit achieved another excellent result in the second quarter. Pre-tax profit was CHF 690 million, down 2% from the record result in first quarter 2002. Continued strict cost control offset the impact of the adverse market environment on revenues. Lower interest and fee income prompted second quarter operating income to fall to CHF 1,614 million, down 3% from the first quarter.
Credit loss expense fell 11% from the first quarter, underlining a further improvement in the quality of the Swiss loan portfolio while operating expenses and headcount fell to all-time lows. The cost/income ratio remained unchanged at 55%.
Private Banking's pre-tax profit was CHF 574 million, down 4% from the first quarter of this year. Operating income, at CHF 1,562 million, fell 2% from the first quarter on lower asset-based revenues, which also fell 2%. Asset-based revenues represented 71% of total income in the second quarter. The gross margin increased slightly to 94 basis points.
Net new money in the quarter totalled CHF 3.5 billion, an increase of CHF 0.9 billion from the first quarter -- an encouraging result considering the difficult market environment and outflows due to the Italian tax amnesty. Total amnesty-related flowback to Italy was CHF 6.8 billion in the second quarter, although UBS was again able to retain almost half of these funds (CHF 3.0 billion) within its Italian domestic private banking operations. The European wealth management initiative continues to grow and expand. Income rose 14% to CHF 49 million from the first quarter, while net new money was CHF 1.8 billion, up by CHF 0.5 billion.
From the third quarter of this year, the UBS Switzerland Business Group will, as previously announced, become UBS Wealth Management & Business Banking. The new name has been effective since 1 July. UBS will continue to show the Business Group's private banking activities separately from its retail and corporate banking businesses. In addition, separate revenue data and key performance indicators will be disclosed for the International Clients and Swiss Clients segments of the Private Banking business.
UBS Global Asset Management
UBS Global Asset Management reported pre-tax profit of CHF 59 million in second quarter 2002. The drop of 21% from the previous quarter was primarily due to the drop in market values of invested assets, resulting in lower management fees and lower performance fees. A continued sharp focus on managing costs prompted second quarter operating expenses to fall to CHF 432 million, down 10% from the first quarter.
Because of currency movements and significant financial market declines, total invested assets decreased to CHF 612 billion at end-June 2002 from CHF 677 billion at end-March. The institutional business recorded positive net new money inflows of CHF 1.8 billion, with strong inflows in equity mandates, particularly in Asia Pacific and the Americas. The Wholesale Intermediary business (previously classified as Mutual Funds) saw net outflows of CHF 4.9 billion this quarter because of outflows from money market funds, which were partially offset by inflows in higher margin equity and alternative GAM funds.
Despite an extremely difficult equity market environment in the second quarter, UBS Global Asset Management strengthened its relative investment performance.
UBS Warburg's Corporate and Institutional Clients business unit recorded a solid result in second quarter 2002, with net profit before tax of CHF 938 million, 8% lower than the same period last year and 2% lower than first quarter 2002. Operating income was CHF 3,778 million in the second quarter, dropping 11% from second quarter 2001 and 9% from first quarter 2002. A resilient performance in the fixed income and foreign exchange business partially offset the impact of lower levels of corporate activity and the difficult conditions in equity markets.
Personnel expenses fell 10% compared to the second quarter of last year and were down 15% from the first quarter of this year. This was mainly due to lower revenues, which prompted a corresponding fall in accruals made for performance-related compensation. General and administrative expenses declined 17% from the same period last year, reflecting the success of cost management initiatives.
UBS Warburg grew its US investment banking market share to 3.7% at end-June from the 3.4% recorded for 2001. Strong momentum in the key US market, disciplined risk management and overall business strength helped UBS Warburg to win one of the industry's leading accolades -- "Best Investment Bank" in the Euromoney Awards for Excellence.
UBS Capital recorded a pre-tax loss of CHF 519 million in second quarter, CHF 167 million more than the second quarter a year ago. The widened loss reflects tough economic conditions for companies in the portfolio and the restrictive environment for divestments. Writedowns totalled CHF 513 million and were made across the portfolio. UBS Capital will continue to focus on managing down the portfolio, maximizing returns, and capitalizing on exit opportunities where they exist.
UBS PaineWebber recorded a pre-tax loss of CHF 137 million during the second quarter. Before acquisition costs (goodwill, net funding costs and retention payments), the Business Group reported a pre-tax profit of CHF 165 million. Since UBS PaineWebber's transactions are primarily denominated in US dollars, comparison of second quarter 2002 results to prior periods is affected by the decline of the US dollar against the Swiss franc. In dollar terms, performance before tax and acquisition costs increased 10% from first quarter 2002.
Operating income was CHF 1,426 million, down 11% from the first quarter. Expressed in US dollars, the decline was 3%.
In response to the challenging market environment, UBS PaineWebber continued to cut costs. Operating expenses declined 12% from the first quarter to CHF 1,563 million. Expressed in US dollars, operating expenses were down 4% from first quarter 2002, personnel expenses fell 3% and non-personnel expenses were down 5%. The decline in personnel expenses is principally driven by falling revenue-based compensation and the reduction in the number of non-financial advisor personnel. The cost/income ratio before acquisition costs fell again, to 89% in second quarter 2002 from 90% in the first quarter.
Invested assets totaled CHF 646 billion at the end of the quarter, a decline of 17% compared to first quarter 2002 and a decline of 6% if the impact of the falling dollar is excluded. Net new money declined to CHF 1.4 billion in second quarter from CHF 7.4 billion in the first quarter. While the decrease reflects both the timing of US client tax payments and the very difficult market situation in the US, UBS PaineWebber achieved a positive net inflow for the seventh consecutive quarter since becoming part of UBS, demonstrating the trust investors place in quality advice.
In second quarter 2002 and 2001, there were no significant financial events. In first quarter 2002, UBS realized a pre-tax gain of CHF 155 million from the sale of Hyposwiss. This was recorded as a significant financial event, affecting the first quarter 2002 results of UBS Switzerland's Private Banking business unit.
(see UBS Second Quarter 2002 Report for the full details of the effect of significant financial events in 2002 and 2001.)
Zurich / Basel, 13 August 2002