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UBS’ advisory business drops despite soaring profits for U.S. unit

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UBS saw pretax profits rise for its U.S. wealth management operations, but not for the firm's overall advisory business, even after a significant belt tightening effort has been underway.

CEO Sergio Ermotti pledged to continue cost-cutting after profit at the firm's global wealth-management business fell and the securities unit was hurt by a slump in equities trading.

The wirehouse's U.S. business was the bright spot of third quarter earnings reported on Friday. Pretax profit were $328 million, up $60 million or 22% due to higher revenue and lower operating expenses, the wirehouse reported.

Revenue increased to $1.98 billion, up 3%. Net interest income surged to $370 million, up $59 million or 19%. UBS attributed the increase to higher short-term interest rates as well as growth in loan and deposit balances. Recurring net fee income, on the other hand, increased to $1.24 billion, up $10 million, due to higher managed account and advisory fees, and an increase in invested assets.

Operating expenses were largely unchanged at $1.66 billion, however adjusted operating expenses were down slightly to $1.62 billion, a decline of 1% due to $43 million in lower net expenses in provisions made for litigation, regulatory and other related expenses, the wirehouse reports.

Adviser headcount was 7,087, down 29 advisers compared to the last quarter.

Revenue continues to fall for the industry's largest brokerages, but lending remains strong.
August 10

The firm, however, told a different story regarding its overall wealth-management division, which had a pretax profit of $504 million francs ($507 million), down 21%, missing the $580 million-franc estimate of analysts at Citigroup Inc. The unit reported net new money of 9.4 billion francs, up from 6 billion francs in the second quarter, driven by the Asia-Pacific region and Europe.

Pretax profit for the entire firm rose to $877 million francs ($882 million) up 11% from 788 million francs ($793 million) a year earlier on lower expenses, UBS reported. That compares with the 862 million-franc ($868 milllion) average of six analyst estimates compiled by Bloomberg.

Ermotti, 56, has been forced to deepen cost cuts and scrap some profitability goals as negative interest rates, faltering emerging markets and clients’ unwillingness to trade undermined earnings. While a rebound in fixed-income trading boosted third-quarter revenue at rivals BNP Paribas and Deutsche Bank, UBS made wealth management the focus of its strategy in 2012.

Wealth management has “come right back into the fold in terms of being a focus of cutting costs as we’re seeing in most banks around the world as they grapple with very low levels of revenue,” Chris Wheeler, an analyst at Atlantic Equities, told Bloomberg.

UBS swung between gains and losses, with the shares up 2.2 percent at 14.23 francs ($14.33) at 1:51 p.m. in Zurich. They have dropped about 27% this year, while rival Credit Suisse Group lost 36% of its market value.

Revenue fell to 7.03 billion francs ($7.08 billion), a drop of 2%, while the cost-to-income ratio was at 88%, down from 89%. Net income declined to 827 million francs ($8.33 million), down 60%, on lower tax gains, missing analyst estimates.

UBS in July scrapped its near-term guidance for an annual adjusted return on tangible equity, a measure of profitability, as well as the adjusted cost-to-income ratio, having missed both of them in the second quarter. In the three months through September, the ROTE measure was 10.1% on an annualized basis, below the 15% the bank wants to achieve over the cycle.

Ermotti, who took over in 2011, is seeking to lower costs by 2.1 billion francs ($2.1 billion) through 2017. The target doesn’t include the effects from exiting businesses or “any reduction of cost due to variable compensation that is driven by financial performance,” the CEO told Bloomberg, without elaborating.

“It’s a fairly demanding task that we have in front of us,” Ermotti said. “Our wealth-management businesses both in the U.S. and internationally have been going through a comprehensive cost-reduction program. You start to see the benefit as we speak.”

UBS had restructuring costs of 444 million francs ($447 million), up from 298 million francs ($300 million) a year earlier, with the bank forecasting charges to remain at around the same level through 2017. Chief Financial Officer Kirt Gardner said on a call on Friday that restructuring costs may exceed the 3 billion francs ($3 billion) initially estimated, partly because of “substantially higher regulatory expenses,” with 2.3 billion francs ($2.3 billion) already realized since the beginning of 2015.

“It’s a cost beat so management is doing the right thing in terms of being proactive,” Chirantan Barua, an analyst at Bernstein with an underperform rating on the stock. However, “you see a fundamental income problem shaping up for UBS -- margins are still down and the investment bank has underperformed peers.”

With additional reporting by Bloomberg.

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