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The Private and Corporate Clients unit achieved another excellent result in the second quarter. Pretax profit was CHF 690 million ($466 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 ($1,091 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 ($388 million), down 4% from the first quarter of this year. Operating income, at CHF 1,562 million ($1,055 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 totaled CHF 3.5 billion ($2.4 billion), an increase of CHF 0.9 billion ($0.6 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 ($4.6 billion) in the second quarter, although UBS was again able to retain almost half of these funds (CHF 3.0 billion) ($2.0 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 ($33 million) from the first quarter, while net new money was CHF 1.8 billion (1.2 billion), up by CHF 0.5 billion ($0.3 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 ($40 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 ($292 million), down 10% from the first quarter.
Because of currency movements and significant financial market declines, total invested assets decreased to CHF 612 billion ($414 billion) at end-June 2002 from CHF 677 billion ($457 billion) at end-March. The institutional business recorded positive net new money inflows of CHF 1.8 billion ($1.2 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 ($3.3 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 ($634 million), 8% lower than the same period last year and 2% lower than first quarter 2002. Operating income was CHF 3,778 million ($2,553 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 U.S. investment banking market share to 3.7% at end-June from the 3.4% recorded for 2001. Strong momentum in the key U.S. 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 ($351 million) in second quarter, CHF 167 million ($113 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 totaled CHF 513 million ($347 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 ($93 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 ($111 million). Since UBS PaineWebber's transactions are primarily denominated in U.S. dollars, comparison of second quarter 2002 results to prior periods are 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 ($964 million), down 11% from the first quarter. Expressed in U.S. 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 ($1,056 million). Expressed in U.S. 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 nonfinancial 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 ($436 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 ($0.9 billion) in second quarter from CHF 7.4 billion ($5.0 billion) in the first quarter. While the decrease reflects both the timing of U.S. client tax payments and the very difficult market situation in the U.S., 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.