UBS Doubles Dividend, Sees A Few Issues Along With Q4 Results
UBS (NYSE:UBS) had a lot of information to share as a part of its Q4 2014 earnings on Tuesday, February 10, as the Swiss bank announced a strong operating performance for the quarter and its intention to double its dividends, along with news of a few impending issues. [1] UBS’s investment banking business had a good run over the period, with marked increases in advisory as well as equity underwriting fees complementing higher equities trading revenues. The bank’s Americas wealth management business also reported its highest-ever revenue figure. Notably, UBS increased the size of its legal provisions by just CHF 176 million ($190 million).
The outlook, however, is less rosy. Firstly, UBS expects a dent in its profitability from the Swiss central bank’s unexpected decision last month to abandon the cap on the Swiss franc. With the franc gaining against the U.S. dollar and the euro, the bank will end up reporting lower revenue and profit figures for its operations in the U.S. and Europe in the near future. Also, the bank acknowledged a fresh probe by the U.S. Justice Department into its alleged role in helping U.S. citizens evade taxes. The fact that this probe comes on the heels of a record settlement of tax evasion charges by Credit Suisse (NYSE:CS) last year does not bode well for UBS. Moreover, UBS continues to be under investigation from several U.S. authorities for its role in manipulating foreign-exchange rates. The bank reached a partial agreement with U.S., British and Swiss authorities on the matter last November (see Five Banks Settle Forex Manipulation Charges For $3.4 Billion).
While the growing legal burden definitely presents a downside to UBS’s value, the Swiss bank remains the best capitalized global banking group, with a fully applied Basel III common equity tier-1 capital ratio of 13.4%. This coupled with the bank’s efforts to refocus its efforts away from debt trading and on its global wealth management operations leads us to reiterate our $20 price estimate for UBS’s stock. This estimate is about 15% ahead of the current market price.
See our complete analysis of UBS here
Equities Trading Desk Provides Top Line A Boost
UBS made a drastic change to its investment banking operations in 2012 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 over 15% of the bank’s share value compared to less than 4% by the fixed-income trading desk. The new strategy, however, put the onus of driving the top line squarely on the bank’s equities desk. Given that the quarter saw global equity markets report an increase in activity levels, UBS’s equity trading desk was well-positioned to gain from the improved market conditions. Moreover, as UBS no longer relies on debt trading to drive its revenues, it remained largely unaffected by the increased debt market volatility in December, which hurt revenues for most global investment banks.
UBS reported CHF 918 million ($990 million) in equities trading revenues for the quarter – a 10% improvement year-on-year and a 4% jump sequentially. The M&A advisory revenues of CHF 242 million ($260 million) were among the best since the economic downturn, and equity underwriting fees also saw a 41% increase compared to the previous quarter to reach CHF 278 million ($300 million).
Wealth Management Operations Lukewarm
UBS’s revamped business model hinges substantially on its global wealth management business, and the unit reported a strong performance for full-year 2014 despite stumbling in the last quarter. Although the wealth management operations reported revenues in excess of CHF 2 billion ($2.2 billion) for just the second time ever, the figure was slightly lower than what UBS reported in the previous quarter. The reason for this was the net outflows for the bank’s European unit, which undermined the strong performance by its Asia-Pacific operations. The total size of invested assets grew to a record CHF 987 billion ($1.1 trillion) thanks to net inflows of CHF 5 billion ($5.4 billion) in the Asia-Pac region.
The wealth management business in the Americas fared better with record revenues of $1.9 billion. The bottom line did not see an improvement quarter-on-quarter, though, as UBS spent more to compensate its employees this time – resulting in a 15% reduction in pre-tax incomes compared to the previous quarter as well as year-ago quarter. Having crossed the $1-trillion mark in terms of assets under management in Q3 2014, the unit gained from positive market movements as well as net inflows in Q4.
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- Q4 2014 News Release, UBS Website, Feb 10 2015 [↩]