The Swiss banking giant UBS (NYSE:UBS) chose to take a rather unconventional approach of releasing a series of announcements starting early last week leading up to its earnings on July 30. After transforming its business model last quarter after several quarters of hard work focused on strengthening its capital structure and improving profitability (see UBS Shows The Strength Of Its New Business Model With Solid Q1 Results), UBS went on to post another better-than-expected performance for Q2 2013.  The sequential improvements in overall operating results did not show in the income statement only due to a $885 million charge the bank incurred from settling its troubling mortgage-related lawsuit with the FHFA.  The largest Swiss bank generated CHF7.4 billion ($8 billion) in net revenues for the period, backed by a record performance by its wealth management business in the Americas, as well as from yet another strong performance by its equities trading desk.
The bank also had another piece of good news to offer investors as it expects to exercise its option to acquire the StabFund’s equity from the Swiss National Bank (SNB) in the fourth quarter of the year. The StabFund, or stabilization fund, was used as a bail-out mechanism by UBS in the aftermath of the economic downturn of 2008, and has recovered considerably over the years. The transaction will further strengthen UBS’s capital structure under the Basel III norms.
We have updated our price estimate for UBS’s stock from $19 to $20, largely to factor in the better-than-expected margins in the bank’s Wealth Management Americas division.
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- How Have Equity Underwriting Deals Closed By European Investment Banks Trended In The Last 5 Quarters?
- What Was The Share Of Major European Investment Banks In Global Debt Origination For Q4 and FY 2016?
Americas Wealth Management Business Posts Second Consecutive Record Results
UBS’s new business model hinges substantially on its global wealth management business, and going by the performance of these operations over the first half of the year, there is no doubt that the bank’s decision to focus here was spot on. Revenues for the bank’s wealth management business around the globe showed a sequential improvement to an already great Q1 result. The gains did not trickle down to the bottom line for the international and Swiss wealth management operations due to the CHF104 million ($112 million) charge the bank incurred as a result of the Swiss-U.K. tax accord. On the other hand, the Americas business which was unencumbered by similar charges, went on to churn out another record quarter with its CHF243 million ($258 million) in pre-tax income, representing about 24% of the banking group’s total pre-tax income for the period.
It must be mentioned here that UBS cautioned about a possible decline in results for the wealth management business over the near future as the slowdown in Europe and the interest rate uncertainty in the U.S. are expected to keep investors around the globe more risk-averse.
Equities Trading Desk Continues To Live Up To Expectations
By raking in roughly the same amount of revenues as it did last quarter, UBS’s equities trading desk has done more than necessary to quash all doubts about its revenue generating potential. The Q1 2013 results were no fluke, and the equities business is ready to step into the role of driving the top line – something that was the prerogative of the fixed income trading desk before UBS decided to shrink into a fraction of its former self with a reduction in 10,000 jobs in the unit. The singular focus on equities trading is yielding results.
The equities trading desk roped in a handsome CHF 1.1 billion ($1.2 billion) in revenues for the quarter – barely 5% less than the Q1 figure which benefited from the cyclical nature of the trading business.Notes:
- UBS’s second-quarter 2013 result, UBS Press Releases, Jul 30 2013 [↩]
- Preliminary results for 2Q 2013; UBS reaches agreement in principle to settle industry litigation with FHFA for RMBS offerings, UBS Press Releases, Jul 23 2013 [↩]