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UBS 1999 half-year results: Net profit after tax CHF 4 billion - merger completed
UBS earned a Group pre-tax profit of CHF 5,239 million (+14%) for first-half 1999. Net profit after tax and minority interests increased 13% to CHF 3,962 million, equivalent to diluted earnings per share of CHF 18.84 and an annualized return on equity of 21.1%. Group assets under management grew by CHF 93 billion since year-end 1998 to CHF 1,665 billion (+5.9%). The completion of the integration has set a new international benchmark in efficiency and speed. UBS is confident for 1999 as a whole.
UBS reports a Group pre-tax profit of CHF 5,239 million for first-half 1999, 14% higher than for the equivalent 1998 period. Total operating income was up 5% to CHF 15,240 million, while total operating expenses increased by 1% to CHF 10,001 million. The cost-income ratio improved from 66.8% to 63.0%.
The Group accounts include a pre-tax gain of CHF 1,800 million from the sale of the 25% stake in Swiss Life / Rentenanstalt, the divestment of the Julius Baer registered shareholding and from the disposal of the international operations of the Global Trade Finance business. In the corresponding period of the previous year, UBS realized a pre-tax gain of CHF 1,058 million from the sale of BSI-Banca della Svizzera Italiana and Adler. Adjusted for the mentioned pre-tax gains on divestments made in first-half 1998 and first-half 1999, their impact on operating income and expense and the taxes associated with these items, net profit was 13 % higher than for the equivalent 1998 period.
UBS pleased with half-year result
UBS is pleased with the group financial performance which is well within expectations considering the background of an ambitious and challenging integration process including the complex transition to a common IT platform in Switzerland. Thanks to an outstanding effort by all concerned, the integration process was completed on schedule.
According to Marcel Ospel, President and Group CEO, "UBS chose and successfully executed a rapid integration despite the challenge thus created for growing the normal business in the short term. By doing so, we have put ourselves in a position as quickly as possible to concentrate on further building the franchise and accelerating its growth."
Challenges facing a global integrated investment services firm
UBS has not only accomplished the swiftest integration of two banking groups of this size but has also positioned itself successfully as a global integrated investment services firm and as the leading bank in Switzerland. Ongoing globalization, the advent of new technology-based solutions and the increased importance of disciplined risk management create enormous opportunities. As an integrated investment services provider, UBS has the ability to respond rapidly and flexibly to evolving client needs, offering a full range of quality products across all major markets. It also possesses the financial strength and earnings generating capacity to benefit from these opportunities to an exceptional degree.
UBS expects the global market for investment services to experience strong growth, driven by demographic trends, pension and social security reform and in Europe additionally by the introduction of the euro. UBS will participate fully in this attractive business environment and leverage the potential in this market provided by its client franchise and its superior products and technology.
UBS is equally well-placed to benefit from growth in e-commerce. The Internet, which is enjoying increasing acceptance among clients, is developing into a powerful global marketing and distribution channel. UBS intends to exploit this technology to deliver a full range of electronic services to its clients. Already a market leader in electronic banking, UBS has an excellent basis for success going forward.
The Private Banking Division achieved a pre-tax profit of CHF 1,388 million for the first half of 1999, fully in line with expectations. 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 1,539 million. In addition to integration-related factors, which temporarily hampered new business development, results were impacted by lower income from brokerage services, weaker foreign exchange revenues and costs associated with investments in expanding domestic private banking outside Switzerland.
Assets under management grew 8.6% or CHF 52 billion since year-end 1998 to CHF 659 billion. Assets under management associated with new clients clearly outstripped those of clients leaving the bank although the majority of the volume increase was performance- and currency-driven. UBS investment funds rose 8.6% to CHF 190 billion: UBS is the market leader in Switzerland and in Europe.
The development of domestic private banking outside Switzerland has progressed rapidly according to plan, both geographically and in terms of staffing. This year, UBS opened Private Banking offices in Spain, Italy and France and a seventh office in Germany; at the same time it strengthened its private banking presence in the major financial centres of London, New York, Singapore and Hong Kong.
The Warburg Dillon Read Division performed strongly, recording pre-tax profits of CHF 1,543 million (+37%). Excluding the pre-tax gain resulting from the sale of the Global Trade Finance business, this represents a 19% increase over the particularly good first half of 1998. The result clearly demonstrates the quality of the Warburg Dillon Read client franchise and its earnings generating power. The Equities business area performed extremely well and Fixed Income business also contributed strongly to revenues across all major products. Corporate Finance developed in line with expectations with strong generation of advisory fees while primary equity revenues were lower than those in the comparative 1998 period which had been exceptionally good. As expected, the Treasury Products business area continued to perform well, despite the decrease in business that had been anticipated as a result of the introduction of the euro. The reduction in the international credit portfolio continued as planned.
Warburg Dillon Read is already a leading player in e-commerce. Through focused strategic investments in people and technology, the Division will constantly enhance its service delivery to clients.
The Private and Corporate Clients Division reported a pre-tax profit of CHF 582 million for first-half 1999 (+24%). Operating income (+6.5%) was higher mainly due to positive interest margin developments, while costs increased by 3%. Assets under management rose by 2% to CHF 443 billion since year-end 1998.
The integration process in Switzerland was brought to a successful conclusion, the last milestone being reached on schedule with the migration of the final tranche of 2.5 million master client accounts to a common IT platform. Within the space of a year, over 1,000 ATM's have been converted, 130 redundant branches closed and over 23,000 employees trained in new products, processes and IT systems. At the same time, substantial progress has been made in technology-based banking: at the end of June 1999, some 180,000 clients were using UBS's telebanking services (Internet, Videotex).
Pre-tax profit at UBS Brinson was CHF 153 million for the first half of 1999. Profitability in the Brinson business area was dampened by European client attrition in the aftermath of the merger. New business, however, continues to develop as planned. Phillips & Drew business area results were down significantly year-on-year although investment performance has improved sharply in recent months. Assets under management increased by 6% to CHF 563 billion since year-end 1998, of which institutional assets were CHF 376 billion, up 4.4% year to date. Investment fund assets managed by UBS Brinson grew 9.4% since year-end to CHF 187 billion.
UBS Capital, which specializes in private equity investment, achieved pre-tax profits of CHF 56 million in first-half 1999. As revenues are deal-dependent, short-term comparisons are less meaningful in this business. Costs remained in line with the previous year. As of 30 June 1999, the book value of the portfolio was CHF 2.4 billion, up from CHF 1.8 billion at the end of 1998, while the market value rose from CHF 2.7 billion to CHF 3.5 billion. This resulted in an increase in unrealized gains of CHF 0.2 billion to CHF 1.1 billion as at 30 June 1999. UBS Capital is well on track to meet its target portfolio size of approximately CHF 4 billion.
Results from the Group financial accounts
Operating income rose by 5% compared with first-half 1998 to total CHF 15,240 million. Net interest income was 1% higher at CHF 3,365 million despite the loss of revenues associated with the divestment of subsidiaries and the ongoing reduction in the international loan business. This result is primarily a reflection of positive interest margin developments in the domestic loan business which are driven by consistently applied risk-adjusted pricing. Credit loss expense was CHF 635 million compared to CHF 310 million for the first half of 1998, when a significant part of the charge was reduced by the allocation of previously established provisions. Viewed as a whole, the situation has improved significantly compared with first-half 1998, due in part to the stronger economic environment in Switzerland. There was a further improvement in the quality of the overall loan portfolio. At the end of June 1999, the bank had CHF 14 billion in non-performing loans, down from CHF 15.7 billion at year-end 1998. The non-performing assets as at mid-1999 are 103.5% covered by allowances and provisions.
Net fee and commission income totalled CHF 6,184 million. The decrease of 6% is substantially due to the divestment of subsidiaries and the associated reduction in income. Investment fund fees performed strongly. Brokerage fees, while affected by declining Swiss Stock Exchange volumes, are distorted by the inclusion of divestment-related income in first-half 1998 no longer being reflected in 1999 figures. Corporate finance fees experienced double-digit growth while underwriting fees were down relative to an exceptionally strong first-half 1998.
Net trading income increased strongly, rising by 26% to CHF 3,986 million. Generally good conditions on the financial markets led to higher volumes in secondary trading for clients and to substantially higher revenues from equities. Fixed income trading revenues were also strong across all major products. Income from foreign exchange and bank note trading, on the other hand, was down.
Other income, including income from associates, was up 37% to CHF 2,340 million. This reflects disposal-related gains of approximately CHF 1,800 million pre-tax, compared with CHF 1,058 million in first-half 1998.
Operating expenses were marginally higher at CHF 10,001 million (+1%). Personnel expenses increased 18% to CHF 6,819 million. Strong results at Warburg Dillon Read led to higher performance-related compensation, which more than offset the cost savings resulting from the merger and divestments. Additionally, accrual of performance-related compensation in 1998 was on a linear basis while accrual in 1999 is non-linear, reflecting strong year-to-date results. General and administrative expenses decreased by 28% to CHF 2,318 million, as merger-related cost savings gathered momentum. Excluding the impact of the provision from first-half 1998 for the class-action settlement in the United States, the expense reduction is 13%. Depreciation and amortization was 5% lower at CHF 864 million.
Status of restructuring provision
Of the CHF 7 billion merger-related restructuring provision booked in 1997, a total of CHF 5,165 million has been utilized since the beginning of 1998. CHF 1,138 million of this was drawn in the first half of 1999 to cover costs relating to IT integration, premises and personnel.
Preparations in the IT and operational areas for the transition to the year 2000 have been moving ahead as planned. 97% of remediation work on critical systems had been completed by the end of June 1999. The remainder is scheduled to be completed before the end of September. UBS fully supports the initiatives launched by the Swiss Bankers Association to prepare Switzerland's financial system in an optimum manner for the millennium changeover. UBS has also taken the leading role in the Swiss interbank taskforce on contingency planning.
In first-half 1999, UBS spent a total of CHF 176 million on year 2000 issues and for the full year expects Year 2000 costs to reach about CHF 370 million.
Outlook for 1999
UBS will continue to develop its market position and is confident for 1999 as a whole.
Zurich/Basel 24 August 1999