Investors will not be surprised when they see that UBS (NYSE:UBS) lost CHF 1.9 billion ($2.1 billion) in the last quarter of 2012 as the largest Swiss bank did the necessary groundwork last December itself by estimating between CHF 2 billion and 2.5 billion in losses for the period (see UBS Settles Libor Manipulation Charges At A Whopping $1.5 Billion).  With the earnings announcement, UBS can draw the curtains on what was the worst year for the bank since 2008 in terms of revenues as well as income – a year marked by drastic organization-wide restructuring and a $1.5 billion settlement over LIBOR manipulation charges.
But as we pointed out in our article UBS’s Results Will Set The Stage For 2013 After Eventful Year, what really matters for UBS in the years to come is how well its capital-strengthening and cost-cutting efforts translate into a profitable and sustainable business model.
On this point, there is some good news. Firstly, UBS now boasts of being one of the best capitalized banks in the list of global systemically important financial institutions – a position that will only be strengthened going forward given its aggressive focus on improving capital ratios.  Secondly, UBS’s new compensation model takes a medium-to-long term approach besides being stingy, which will help margins across businesses while giving employees an incentive to avoid taking short-term risks like the one that cost the bank $2.3 billion in 2011. And finally, results for the wealth management business division show that its profitability problems may finally be a thing of the past.
We are updating our price estimate for UBS based on:
- The announcement of a 50% hike in dividends, which boost our estimates for the bank’s dividend payout rate over our forecast period
- Better than expected margin figures for the bank across operating divisions – especially the investment banking division
- Faster expected growth in assets managed by UBS’s wealth management units
Cost Cutting Efforts Show Promising Signs
In our opinion, the most notable development for UBS in 2012 was the marked reduction in personnel expenses. At the group level, the bank cut down compensation costs from CHF 15.6 billion ($17.2 billion) in 2011 to CHF 14.7 billion ($16.2 billion) in 2012 – a billion dollar reduction in costs despite taking some one-time severance-related costs in Q3 and Q4 2012. The investment banking operations showed the most improvement with these costs coming down by just over 10% from 2011 figures to reach CHF 5.1 billion ($5.6 billion) in 2012.
With UBS still in the process of eliminating 10,000 jobs, the cost figures will only go down further next year – allowing the investment bank margins to improve substantially. Our estimates for these margins are shown in the chart below.
Wealth Management Americas Churns Out Record Profits
UBS’s wealth management operations across North and South America generated $6.5 billion in revenues in 2012 with the business reporting sequentially higher revenues quarter-on-quarter. Improvements can be seen in the business across all fronts – steadily increasing fee and commission incomes (including increasing recurring incomes), stable personnel expenses and a growing size of assets under management. Consequently, the division announced its highest ever pre-tax income of $873 million for 2012.Notes:
- UBS’s fourth-quarter 2012 result, UBS Press Releases, Feb 5 2013 [↩]
- UBS to buy back outstanding bonds in public tender offers, UBS Press Releases, Feb 5 2013 [↩]