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Aided by better performance from its Wealth Management division, UBS AG has posted a sequential rise in profit in the first quarter of 2012.

The company reported first quarter net profit attributable to shareholders of CHF 827 million ($910 million) or CHF 0.22 per share, up from CHF 319 million or CHF 0.08 per share in the prior quarter. However, earnings were down from CHF 1.8 billion or CHF 0.47 per share in the prior-year quarter.

The quarter’s results at UBS AG were impacted by an own credit loss, a debit valuation adjustment loss on its derivatives portfolio, a reduction in personnel expenses related to changes to the Swiss pension plan and restructuring charges.

Excluding such items, UBS AG’s operating profit before tax increased by CHF 1,411 million sequentially to CHF 2,162 million, primarily reflecting higher operating income. Net new money inflows in the wealth management businesses more than doubled to CHF 10.9 billion.

UBS AG’s operating income advanced 11% from the prior quarter to CHF 6,525 million while operating expenses fell 3% sequentially CHF 5,221 million. Restructuring charges in the reported quarter were CHF 126 million, substantially up from CHF 10 million in the prior quarter.

Notably, UBS AG experienced a 70% sequential increase in operating profit before tax in the Wealth Management division. Retail and Corporate division’s operating profit before tax advanced 40% while that of Wealth Management Americas and Global Asset Management augmented 32% each from the prior quarter. 

Excluding an own credit loss of CHF 1,103 million, the Investment Bank division at UBS AG recorded a pre-tax profit of CHF 730 million in the reported quarter, significantly up from CHF 99 million in the prior quarter. Results reflected higher revenues across all business areas in the backdrop of improved market conditions.

Wealth Management’s net new money more than doubled to CHF 6.7 billion on solid inflows in Asia Pacific, emerging markets and Switzerland, as well as globally from ultra high net worth clients. Also, net new money at Wealth Management Americas more than doubled to USD 4.6 billion.

UBS AG's invested assets were CHF 2,115 billion as of March 31, 2012, up from CHF 2,088 billion as of 31 December 2011, as a result of the positive market performance. However, this was partly offset by the depreciation of the U.S. dollar against the Swiss franc. Moreover, the company experienced a net reduction of CHF 17 billion from the sale of parts of the CHF 25 billion of invested assets which was obtained from ING Investment Management in Australia in the fourth quarter.

UBS AG experienced an increase in regulatory capital. Its Basel 2.5 tier 1 capital increased by CHF 1.2 billion during the first quarter. The company also reduced Basel 2.5 risk-weighted assets by CHF 30 billion to CHF 211 billion. This resulted in an improvement of 280 basis points in its Basel 2.5 tier 1 capital ratio that advanced to 18.7% from 15.9% as of December 31, 2011. 

However, as of March 31, 2012, balance sheet assets stood at CHF 1,366 billion, CHF 53 billion lower than on December 31, 2011, as a result of to market-driven and exposure decreases in positive replacement values.

Outlook

The outlook seems grim with UBS AG predicting no material improvement in market conditions in the second quarter of 2012. Progress on sustained and material improvements tothe ongoing eurozone sovereign debt concerns, the European banking system and US federal budget deficit issues, and uncertainty at large would likely impact the client activity levels in the second quarter.

Therefore, if progress on such issues is not made, then headwinds for revenue growth, net interest margins and net new money will continue.

Yet, UBS AG expects its wealth management businesses to continue to attract net new money. The company also remains on track to achieve its target of CHF 2 billion of cost savings by the end of 2013. Moreover, it is committed to strengthening its capital position and lower its Basel III risk-weighted assets.

Our Take

We believe that the volatile capital market conditions will restrict top-line growth at UBS AG. However, in the midst of the overall economic volatility and the eurozone debt crisis, the company will focus on building up its capital level. Restructuring initiatives are encouraging and we believe that such efforts would help improve its operating efficiency in the years ahead.

One of its rivals, Credit Suisse Group (CS - Snapshot Report), reported its results last week. The company reported a drop in profit from the prior year period as its results were adversely affected by accounting driven fair value losses due to tightening of its own credit spreads. Similar to UBS, Credit Suisse remains focused on increasing its operating efficiencies and boosting its capital levels and reducing risk-weighted assets to adhere to regulatory standards.

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