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UBS announces reintegration of Dillon Read Capital Management Portfolios into the Investment Bank. Outside investor funds to be redeemed
- Net profit attributable to UBS shareholders of CHF 3,275 million, down CHF 229 million from the same period a year earlier (first quarter 2006 included a CHF 290 million after-tax gain from sale of Motor-Columbus) - Financial businesses attributable profit from continuing operations of CHF 3,182 million, a new record and up 4% from both first and fourth quarter 2006 - Total UBS net new money was at an all-time high of CHF 52.8 billion, with CHF 44.8 billion inflow from wealth management businesses worldwide - Diluted EPS from continuing operations of CHF 1.62, up 9% from a year earlier, cost/income ratio of 68.1%, down 0.3 percentage points from first quarter 2006 - Return on equity of 28.7%, down from 29.6% a year earlier, still well above UBS's target of a 20% minimum over the cycle - All business groups reported record profits in first quarter
UBS announced today that the proprietary funds currently managed by Dillon Read Capital Management (DRCM) within Global Asset Management will transition to the Investment Bank. DRCM's principal finance, credit arbitrage and commercial real estate businesses will be merged with relevant business lines within the Investment Bank. DRCM's third party funds will be redeemed. UBS intends to work with DRCM investors to identify alternative investment opportunities for them.
DRCM will continue operations until the transition period is complete which is anticipated to be in Q3 2007.
Peter Wuffli, Group CEO of UBS said, "UBS remains totally committed to alternative investment offerings for our clients. However, based on an assessment of a number of factors, we concluded that the DRCM initiative did not meet our expectations. Consequently we took this decisive action, which is in the best interests of our clients and shareholders."
"Operating a proprietary trading platform outside the Investment Bank and managing client money alongside became too complex and expensive. That, among other reasons, is why we have chosen to reintegrate DRCM into the Investment Bank and to redeem the outside investor funds," said John Fraser, Chairman and CEO of Global Asset Management.
While it is likely that the economic expansion in the US will slow down over the next few months, there is increasing evidence from global macroeconomic data - most notably from Europe and major emerging markets - that the rest of the world economy is in good shape. In particular, UBS does not expect the difficulties being experienced in the US mortgage market to have a negative long-term effect on a global scale.
UBS is convinced that clients will increasingly seek its advice, with financial markets just as challenging as ever. The deal pipeline remains strong and its business model and balanced global presence provide it with many opportunities.
"Over the course of 2007, we will concentrate on consolidating the investments we initiated last year. We will also continue to manage capital, risk and costs in disciplined fashion - and in line with market developments. The performance of our business - in common with the financial industry - tends to be stronger in the first quarter of the year than in the summer. In the past, we have repeatedly proven our strength in delivering strong returns throughout the business cycle, which makes us confident that 2007 will be another successful year of growth for UBS," said Clive Standish.
Performance against targets
UBS focuses on four key performance indicators, designed to ensure the delivery of continuously improving returns to shareholders. All are calculated based on results from continuing operations. The first two, return on equity and diluted earnings per share, are based on the results of the entire firm. The cost / income ratio and net new money indicators are limited to the financial businesses. On this basis, performance indicators in first quarter 2007 show:
Results from the Financial Businesses
annualized return on equity at 28.7%, down from 29.6% in the same quarter a year earlier but well above UBS's target of a 20% minimum over the cycle. Higher attributable net profit was offset by an increase in average equity following strong retained earnings.
diluted earnings per share at CHF 1.62, up 9% or CHF 0.14 from CHF 1.48 in the same quarter a year earlier, reflecting the increase in net profit and a 3% reduction in the average number of shares outstanding as UBS continued to repurchase shares. It was also just below its target of double digit earnings growth.
a cost / income ratio in the financial businesses of 68.1%, slightly better than the 68.4% shown in the same quarter last year. The strong increase in operating income reflected higher revenues in all businesses. This was only partially offset by the increase in personnel expenses, which were driven by higher levels of staff and performance-related accruals.
net new money of CHF 52.8 billion, at its highest level ever, was up from CHF 48.0 billion a year earlier. The wealth management units recorded inflows of CHF 44.8 billion this quarter, up from CHF 33.6 billion in first quarter 2006. Inflows in the international and Swiss wealth management business rose by CHF 9.2 billion to CHF 33.9 billion, mainly driven by higher inflows from Asia and the Americas. Net new money in European wealth management was CHF 5.4 billion in first quarter 2007, down from CHF 6.5 billion in first quarter 2006, as higher inflows in Germany and Italy were more than offset by lower inflows in other European countries. Inflows into the domestic wealth management business in the US were CHF 10.9 billion in first quarter, up from CHF 8.9 billion a year earlier. This increase was driven by inflows from both existing and new clients. The asset management business saw inflows fall to CHF 5.3 billion, down from CHF 12.6 billion a year earlier. Institutional clients reported CHF 2.7 billion in new inflows, mainly driven by contributions from fixed income, multi-asset and alternative investments, partly offset by outflows in equity capabilities. The wholesale intermediary business saw an inflow of CHF 2.6 billion, down from CHF 5.5 billion in the same quarter a year earlier, mainly due to lower inflows in multi-asset and outflows in fixed income. Of the total, CHF 5.8 billion flowed out of money market funds, which tend to experience larger quarterly swings than other asset classes. The Swiss retail banking business recorded net new money inflows of CHF 2.7 billion in first quarter, primarily relating to increased inflows from existing clients.
Invested assets, benefiting from net new money and rising financial markets, totaled CHF 3,112 billion on 31 March 2007, up 4% from 31 December 2006.
Global Wealth Management & Business Banking
Global Wealth Management & Business Banking's pre-tax profit was a record CHF 2,244 million in first quarter 2007, an increase of 3% from fourth quarter 2006.
In the International and Swiss wealth management businesses, pre-tax profit rose 6% to a record CHF 1,501 million in first quarter 2007. Total operating income increased 9%, with recurring income buoyed by the higher asset base. Non-recurring income, up 19%, benefited from significantly higher client activity.
Operating expenses rose 12%, reflecting rising personnel expenses, which were up due to higher performance-related accruals, new staff hires and increased costs for the employee pension plan in Switzerland. General and administrative expenses fell slightly on the release of previously made provisions.
In the US wealth management business, pre-tax profit was CHF 171 million in first quarter 2007, down 2% from CHF 174 million in fourth quarter 2006. In US dollar terms, pre-tax profit fell 3%. Total operating income rose slightly, reflecting a record level of recurring income due to rising managed account fees. This was partly offset by lower non-recurring revenue, which fell mainly on lower performance fees in first quarter 2007. In US dollar terms, operating income was 1% higher than in fourth quarter.
In first quarter 2007, total operating expenses rose marginally. Personnel expenses rose 9%, a result of increased performance-related compensation, higher salary costs due to the integration of personnel from McDonald Investments, and the hiring of additional non-financial advisor staff for growth initiatives. Non-personnel expenses, which include general and administrative, depreciation and amortization expenses, decreased, mainly as a result of lower legal provisions.
Business Banking Switzerland reported pre-tax profit falling 4% to CHF 572 million. The rise in total operating expenses more than offset the marginal increase in total operating income. Net interest income fell, partly reflecting the fewer number of days in first quarter compared with fourth quarter 2006. Non-interest income increased, mainly due to higher client activity levels.
General and administrative expenses rose slightly, mainly due to the fourth quarter release of previously made provisions, which lowered that quarter's expenses correspondingly.
Global Asset Management
Pre-tax profit in first quarter 2007 was CHF 404 million, an increase of 1% compared with CHF 400 million in fourth quarter 2006. This largely reflected the increased average asset base, which led to higher management fees across the business.
Total operating income rose 6%, with Institutional revenues rising on increased management fees across the business, higher performance fees from the Dillon Read Capital Management (DRCM) outside investor fund and the impact of a full quarter of fees earned by the Pactual asset management business. Wholesale intermediary revenues were up on increased management fees, reflecting the higher average asset base during the quarter, the inclusion of a full quarter of revenues from Pactual's asset management business and higher performance fees from equity funds.
Total operating expenses rose 9%, mainly reflecting lower charges-out for investment management services to the Investment Bank. Personnel expenses were down, primarily due to lower incentive-based compensation. General and administrative expenses decreased, with the prior quarter including significant investments in business support areas and IT as well as costs related to the launch of DRCM's first outside investor fund.
In first quarter 2007, pre-tax profit was at an all-time quarterly record of CHF 1,801 million, up 3% from the performance a year earlier.
Total operating income in first quarter 2007 was a record CHF 6,260 million, up 5% from the same quarter a year earlier.
The equities business posted record revenues of CHF 3,128 million in first quarter 2007, up 10% from first quarter 2006, when it benefited from gains on NYSE membership seats. All businesses reported stronger revenues, but the most significant gains were in derivatives, proprietary trading, and equity capital markets. Prime brokerage revenues continued to grow as the number of clients increased and average balances rose, although this was partly offset by lower client spreads.
Fixed income, rates and currencies revenues were CHF 2,265 million, down 7% from the same quarter a year ago. Difficult market conditions in the US mortgage securities market led the business activities managed by DRCM to record losses. Revenues from the other parts of the FIRC business were up 19% from a year earlier. Credit fixed income saw significant growth across all aspects of the business. Emerging markets revenues also saw a strong increase. Performance in the rates business was down overall. A solid result in mortgage-backed securities, which benefited from high market volumes in Europe and Japan, was not enough to offset results from derivatives and government bonds, both of which fell - largely due to a flat yield curve and lower volatility. Trading revenues in power and gas fell in first quarter 2007 from the same period a year earlier, while sales and trading in both commodities structured products and crude oil rose considerably. Performance in the foreign exchange and cash and collateral trading businesses was very strong across the board, as high volumes more than offset the continued pressure on spreads. Emerging markets, base metals, prime services and structured products all had a very strong quarter marked by significant growth.
Investment banking revenues, at CHF 865 million, rose 30% from first quarter 2006. This is a record for a first quarter, reflecting revenue growth in all regions, particularly in the Americas and Asia. Revenues from the advisory business grew strongly in a buoyant environment in which market share improved in all regions. The capital markets business also saw significant growth, led by equity capital markets and leveraged finance.
Total operating expenses in first quarter 2007 were up 6% from the same period last year. Personnel expenses rose as salary costs and contributions to retirement benefit plans increased to reflect higher personnel levels and annual pay increases.
Share-based compensation decreased 6% from the prior-year quarter, mainly reflecting the transfer of DRCM staff to Global Asset Management.
General and administrative expenses decreased by 4%, with the year-earlier quarter including a litigation provision for the settlement agreement with Sumitomo Corporation of CHF 112 million. This was partially offset by increased expenditure on occupancy, IT and other outsourcing and telecommunications and travel, mainly driven by higher personnel levels.
Market risk for the Investment Bank, measured by average VaR (10-day, 99% confidence, 5 years of historical data) increased to CHF 517 million in first quarter 2007 from CHF 391 million in fourth quarter 2006, while the range (the difference between maximum and minimum VaR) increased to CHF 258 million from CHF 162 million. As mentioned in fourth quarter 2006, the integration of Pactual from 1 December 2006 has resulted in an increase in average VaR for the Investment Bank.