UBS Posts Strong Q2 Results As Wealth Management And Investment Banking Divisions Shine
UBS (NYSE:UBS) followed up its best post-recession performance in Q1 2015 with another strong showing in Q2 on the back of its cornerstone wealth management business. [1] While revenues swelled 9% year-on-year, a negligible increase in operating expenses helped the Swiss bank’s pre-tax income figure jump 44% compared to Q2 2014. Interestingly, investors were not thrilled with the bank’s performance, and its share price dropped in trading on Monday, July 27. We attribute this to two factors: Firstly, the sharp gains posted by rival Credit Suisse (NYSE:CS) last week had substantially raised investor expectations for UBS (see Credit Suisse Reports Strong Q2 Results, But Will Face Headwinds In The Future) and had resulted in sizable gains to UBS’s share price late last week. And secondly, UBS’s results for the quarter definitely appear to pale in comparison to the exceptionally strong figures for the previous quarter.
That said, UBS’s revamped business model continues to deliver in a global environment that is not conducive to revenue growth in the banking industry. The wealth management division reported its second best pre-tax income figure since the economic downturn of 2008 (after Q1 2015). Investment banking operations benefited from equities trading gains, as well as from higher advisory and equity underwriting fee revenues. At the same time, UBS strengthened its balance sheet further in Q2, with its common equity tier 1 (CET1) capital ratio (fully applied) growing to an industry-best figure of 14.4% and its leverage ratio (fully applied) reaching 4.7% – both figures comfortably above the target figures that need to be achieved by 2019.
We maintain a $25 price estimate for UBS’s stock, which is about 10% ahead of the current market price.
See our complete analysis of UBS here
Wealth Management Division Anchors Results
UBS’s revamped business model hinges substantially on its global wealth management business, and the division demonstrated its importance by contributing 54% of the bank’s total pre-tax income figure for the quarter. The combined wealth management operations reported an adjusted pre-tax income figure in excess of CHF 1 billion for just the second time since the economic downturn of 2008 – the only other instance being the previous quarter. The Swiss and international wealth management units were responsible for a lion’s share of this figure, with an adjusted pre-tax income figure of CHF 769 million ($800 million). Notably, the division achieved these results despite weak net inflows of just CHF 1.8 billion this time around. This can be explained by the fact that UBS is weeding out less profitable clients in an attempt to improve long-term margins. Although this strategy has hurt growth in the division’s assets base, its benefits are already visible on the bottom line, as the adjusted cost to income ratio improved from 67% in Q2 2015 to 62% in Q2 2015.
It was a lukewarm period for UBS’s wealth management unit in the Americas, though, as elevated operating costs eroded profits. In fact, the adjusted pre-tax income figure of CHF 215 million ($223 million) this quarter was the worst since Q1 2013. Total revenues improved sequentially thanks to an increase in interest income as well as better recurring fees, but the division’s general and administrative expenses shot up to CHF 199 million from CHF 120 million last quarter. Net outflows in the division, coupled with unfavorable foreign exchange movements, also resulted in the total asset base falling below the CHF 1-trillion mark.
Equities Trading Desk Also Boosts The Top Line
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. The move has proven to be a good one for the bank, as it has helped it achieve the best capital ratio figure among all global banking giants without compromising on its returns. The credit for this goes to the bank’s strong equities trading desk, which proved its mettle once again this quarter by posting results which were identical to the highs seen in the previous quarter.
Total trading revenues for the quarter were higher than CHF 1.5 billion in Q2 2015, making it one of the best performances in this regard in the last five years. The bank’s equities unit roped in CHF 1.1 billion ($1.2 billion) in revenues – 30% above the figure for Q2 2014, and marginally lower than the figure for the previous quarter. The watered-down fixed income business also chipped in with CHF 413 million ($428 million). This figure was slightly lower than the figure for the previous year, and a 43% sequential reduction – something that can be attributed to the fact that global debt trading activity fell drastically over the months of May and June.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Second Quarter 2015, UBS Financial Releases, July 27 2015 [↩]