UBS Demonstrates Strength Of Revamped Business Model With Strong Q1 Results
Having spent the larger part of the last two years in shaking up its business model to focus on wealth management, UBS (NYSE:UBS) reported strong Q1 results earlier this week. [1] The Swiss banking giant churned out one of its best figures since the economic downturn of 2008, as a jump in revenues across operating divisions helped pre-tax incomes cross CHF 2.7 billion ($2.95 billion) for the first time since Q1 2010. While the wealth management operations reported the highest adjusted pre-tax income figure in seven years, the investment banking arm also chipped in with its best trading performance in at least four years. At the same time, UBS continued to shore up its balance sheet, with common equity tier 1 (CET1) capital ratio (fully applied) growing to an industry-best level of 14.6% and the leverage ratio (fully applied) reaching 4.3% – both figures comfortably above the target figure that needs to be achieved by 2019. This is in contrast with the sequential reduction in capital ratios reported by its smaller Swiss rival Credit Suisse (NYSE:CS) (see Credit Suisse’s Capital Ratio Shrinks In Q1 Despite Strong Operating Performance).
Investors were clearly impressed by UBS’s better-than-expected performance for the first quarter – especially since the bank had issued a warning earlier this year about the negative impact of the Swiss central bank’s unexpected decision to abandon the cap on the Swiss franc. With the franc gaining against the U.S. dollar and the euro, the bank foresaw lower revenue and profit figures for its operations in the U.S. and Europe in the near future. The fact that UBS comfortably beat expectations despite these notable headwinds was attributed to the strength of the bank’s underlying strategy – a conclusion that helped UBS shares soar 5% over trading on Tuesday, May 5.
As a result of the strong all-around operating performance and the marked increase in CHF-USD exchange rate, we have increased our price estimate for UBS’s stock from $20 to $23. The new price is about 10% ahead of the current market price.
See our complete analysis of UBS here
Wealth Management Division Churns Out Record Profits
UBS’s revamped business model hinges substantially on its global wealth management business, and the division played its role to perfection by reporting its best operating performance since the economic downturn of 2008. The combined wealth management operations reported adjusted pre-tax income figure of CHF 1.1 billion ($1.2 billion) for the quarter – the highest since the recession. The Swiss and international wealth management units were responsible for almost 80% of this figure, as total revenues in excess of CHF 2.2 billion ($2.45 billion) were aided by an adjusted cost to income ratio figure of less than 58%. This compares to a cost to income ratio of 68% in Q4 2014 as well as Q1 2014. The division reported an inflow of CHF 14.4 billion in new cash over the quarter – the highest for a quarter since Q1 2013. Notably, the bank saw an increase in invested assets in each operating region, with the Asia-Pacific region being responsible for a bulk of the inflows.
UBS’s wealth management unit in the Americas also did well, posting a best-ever pre-tax income figure of CHF 277 million ($293 million) this quarter. Total revenues shrunk slightly compared to the figure for the previous quarter as a result of a reduction in interest income as well as transaction-based fees, but operating costs fell faster to allow the bank to report an increase in operating profits. 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 of $4.8 billion in Q1 2015 to end the period with an asset base of $1.05 trillion.
Restructured Investment Banking Division Sees Growth
UBS made drastic changes to its investment banking operations in recent years by announcing plans to reduce its fixed-income trading business to a fraction of its former size by slashing roughly 10,000 jobs. Total trading revenues for the quarter were just shy of CHF 1.9 billion in Q1 2015 – the highest since Q1 2010. This is a commendable achievement, given the fact that the bank’s debt trading desk is substantially smaller now than what it was four years ago. The bank’s equities unit roped in almost CHF 1.2 billion ($1.3 billion) in revenues this time around. This is 15% above the figure for Q1 2014, and a good 27% improvement sequentially. Also, the restructured fixed-income business made CHF 701 million ($765 million) in revenues this quarter – aided by the increased level of activity in foreign-exchange and debt markets globally over the period. This figure marks a jump of more than 70% compared to what the bank reported for the year-ago period.
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- First Quarter 2015, UBS Financial Releases, May 5 2015 [↩]