UBS AG Posts Encouraging Q1 Earnings - Analyst Blog

Impressive first-quarter 2014 earnings of UBS AG UBS had a minimal effect on its share price. The company reported first-quarter 2014 net income attributable to shareholders of CHF1.05 billion ($1.18 billion), which compared favorably with the prior-year quarter earnings of CHF 988 million ($1.1 billion).

Decreased operating expenses reflected prudent expense management. Further, the company experienced own credit gain on financial liabilities. However, reduced net interest and trading revenues (down 21% year over year) and stable net fee and commission income was recorded.

The reported quarter recorded reduced net charges for provisions for litigation, regulatory and similar matters of CHF 193 million ($216.2 million), down 49% year over year.

UBS AG's adjusted pre-tax income came in at CHF 1.5 billion ($1.7 billion) in the reported quarter, down 21% year over year.

Performance in Detail

UBS AG's operating income decreased 6.4% from the prior-year quarter to CHF 7.3 billion ($8.2 billion) while operating expenses decreased 6.3% year over year to CHF 5.9 billion ($6.6 billion). The reduction in expenses was mainly due to lower personnel expenses.

On a year-over-year basis, adjusted operating profit before tax decreased 4.5% at its Wealth Management division and 21.3% at the Global Asset Management unit. However, operating profit moved up 22.9% at the Wealth Management Americas division and 10.8% at Retail & Corporate division. Further, Corporate Center reported a loss.

Moreover, at UBS AG's Investment Bank unit, the company experienced an adjusted pre-tax profit of around CHF 549 million ($614.9 million), down 41% year over year.

Notably, UBS AG experienced own credit gain on financial liabilities of CHF 88 million ($98.6 million) as against loss of CHF 181 million ($194.6 million) in the prior-year quarter. Further, the company recorded net restructuring charges of CHF 204 million ($228.5 million) in the reported quarter, down 17% year over year.

Capital Position

As of Mar 31, 2014, UBS AG's invested assets were CHF 2,424 billion ($2,732.4 billion), up CHF 34 billion sequentially and CHF 51 billion year over year.

The company's phase-in BIS Basel III common equity tier CET 1 ratio stood at 17.9% as of Mar 31, 2014, compared with 15.3% in the prior-year quarter and 18.5% in the prior quarter.

Further, phase-in BIS Basel III CET 1 capital increased by CHF 1.0 billion to CHF 41.2 billion ($46.4 billion) as of Mar 31, 2014. Phase-in CET1 capital decreased CHF 1.0 billion on a sequential basis, mainly reflecting the effect of capital deductions associated with transitional effects effective from Jan 2014.

Phase-in Basel III risk-weighted assets (RWA) declined CHF 32.6 billion year over year to CHF 229.9 billion ($259.2 billion). Yet, phase-in RWA increased by CHF 1.3 billion sequentially, largely reflecting increase in operational risk RWA and market risk RWA, partly offset by reduced credit risk RWA.

On a fully applied basis, UBS AG's BIS Basel III common equity tier 1 ratio increased 310 basis points year over year and 40 basis points sequentially to 13.2%, which surpassed the company's target of 13.0% for 2014. Swiss systemically relevant banks (SRB) leverage ratio stood at 5.0%, up 120 basis points year over year and 30 basis points sequentially.

Fully applied RWA declined to CHF 226.8 billion ($255.7 billion) from CHF 258.7 billion ($272.3 billion) as of Mar 31, 2013. However, it increased slightly on a sequential basis by CHF 1.6 billion.

As of Mar 31, 2014, total assets stood at CHF 982.5 billion ($1.1 trillion), dropping CHF 35.9 billion from Dec 31, 2013 and CHF 231.3 billion from Mar 31, 2013.

Outlook

According to UBS AG, failure to attain persistent progress on material improvements regarding unresolved issues in Europe, US fiscal and monetary issues and the ongoing global concerns, as well as the uncertainty at large, could impact the client activity levels and trading volumes in the second quarter of 2014. However, with the execution of its strategies, the company expects to generate sustainable returns for shareholders.

In Conclusion

Amid the overall economic volatility, UBS AG will focus on building its capital level. Though restructuring initiatives are encouraging, given the stressed operating environment, we believe any significant improvement in earnings would remain elusive in the upcoming quarters.

UBS AG currently carries a Zacks Rank #4 (Sell). Some better-ranked foreign banks include Banco Macro S.A. BMA, Grupo Financiero Galicia S.A. GGAL and ICICI Bank Ltd. IBN. All 3 carry a Zacks Rank #1 (Strong Buy).