Swiss banking giant UBS (NYSE:UBS) saw its shares soar 6% over trading this Tuesday after it posted better-than-expected performance figures for the last quarter of 2013.  While the bank’s decision to hike dividends by 67% and its exceptionally strong balance sheet stand out in support of the boost in UBS’s share value, a closer look at the results show that the bank hasn’t really seen much of an improvement on the operating front when compared to the previous quarter. The top line figures were nearly identical, and benefits from lower legal costs for the quarter were almost entirely cancelled out by an increase in compensation costs as UBS hiked its bonus pool for the year. The CHF 470 million ($520 million) tax benefit recorded in Q4 2013 compared to a benefit of CHF 222 million ($245 million) in Q3 2013 was largely responsible for the 60% increase in the bottom line figures quarter-on-quarter.
That said, UBS comfortably leads all global banking groups when it comes to Basel III readiness, with a fully applied Tier-1 common capital ratio of 12.8%. Its efforts to refocus its investment banking efforts away from debt trading also helped it avoid the sharp revenue decline seen by its peers JPMorgan (NYSE:JPM) and Citigroup (NYSE:C), which have considerably more exposure to the debt market, in Q4. We maintain our $21 price estimate for UBS’s stock, which is about 5% ahead of the current market price.
Trading Revenues Took A Beating Over The Second Half Of 2013
UBS made a drastic change to its investment banking operations last year by announcing plans to reduce its fixed-income trading business to a fraction of its former size by slashing roughly 10,000 jobs. The impact of this on UBS’s business model can be seen from the chart above, which shows that equities trading contributes almost 18% of the bank’s share value compared to less than 4% by the fixed-income trading desk.
The move, however, put the onus of driving the top line squarely on the bank’s equities desk, which actually lived up to expectations over the first two quarters of 2013, generating CHF 2.3 billion (~$2.5 billion) in revenues for H1 2013. But these revenues fell sequentially over the last two quarters to bring in just CHF 1.7 billion (~$1.9 billion) over H2 2013.
This is still much better than the performance of the restructured fixed income business, which brought in just under CHF 1.6 billion (~$1.75 billion) in revenues for the entire year. But the impact of reduced trading revenues on the bank’s top line would have been more pronounced if the advisory and underwriting operations had not stepped in with better-than-expected revenues for the last quarter. A 40% jump in advisory & underwriting revenues quarter-on-quarter offset declining trading fortunes to increase overall investment banking revenues by 9%.
Wealth Management Reaffirms Its Importance
UBS’s revamped business model hinges substantially on its global wealth management business, and the unit did not disappoint in 2013. The bank churned out strong results over the first two quarters of the year, and followed up with a largely positive performance over the second half. The bank had already cautioned in late July that the results over subsequent quarters will be lower due to the slowdown in Europe and the interest rate uncertainty in the U.S. Revenues improved over the last quarter compared to the previous quarter, and the only reason the improvement did not reflect in net income figures was due to the higher incentive-based compensation. Quite notably, UBS ended the year as the world’s largest wealth manager – surpassing Bank of America (NYSE:BAC) to the top spot early last year (see UBS Dethrones Bank of America As World’s Largest Wealth Manager).
Also, the wealth management business in the Americas reported a record quarterly performance for Q4 2013 with its highest-ever pre-tax income figure of $254 million for the period. While the prolonged low interest rate environment in the U.S. hit interest incomes for the division, the increase in assets under management from $919 billion in Q3 to $970 billion helped non-interest income grow 8% over the period.Notes: