Bloomberg News

UBS Plans Special Payout to Investors as Capital Rises

May 06, 2014

UBS CEO Sergio Ermotti

Sergio Ermotti, chief executive officer of UBS AG. Photographer: Valentin Flauraud/Bloomberg

UBS AG (UBSN), Switzerland’s largest bank, said it plans a special payout for investors on top of higher dividends after it reaches capital targets this year. The shares rose.

UBS will pay out at least 25 centimes a share after reorganizing to satisfy regulators’ demands for separate legal entities in different regions, the Zurich-based bank said today. The structural changes will reduce its capital requirements, said UBS, which reached a common equity ratio above its 13 percent goal at the end of March.

Europe’s largest banks have been accumulating capital to fortify their balance sheets since the financial crisis of 2008 led to state bailouts of lenders, including UBS. Swiss regulators were among the most demanding, requiring UBS and Credit Suisse Group AG (CSGN) to build up equity faster than competitors in Britain, France and Germany. Now investors are anticipating bigger dividends.

The extra payment to shareholders is part of UBS’s “capital return story,” Chief Executive Officer Sergio Ermotti said in a Bloomberg Television interview. UBS is “most likely” to reach its profitability goal in 2016, after the Swiss regulator’s demand that it hold more capital delayed the target by a year, Ermotti said.

“This is the first bank in Europe that is now really starting to return some capital to shareholders,” said Christopher Wheeler, an analyst with Mediobanca SpA. “The Swiss have an advantage because they’ve been pushed harder by the regulator at an earlier stage to boost capital. UBS will have to use extra capital for dividends and share buybacks, otherwise they’ll never make the target for a 15 percent return on equity.”

Higher Earnings

UBS advanced as much as 2.1 percent in Zurich trading, and was up 1 percent to 18.46 francs by 12:04 p.m. The 9.1 percent increase this year exceeds the 2.2 percent gain in the 43-company Bloomberg Europe Banks and Financial Services Index.

First-quarter net income rose 6.7 percent from a year earlier to 1.05 billion Swiss francs ($1.2 billion), UBS reported today, above the 885 million-franc average estimate of 11 analysts surveyed by Bloomberg. Even so, operating profits at divisions missed forecasts, according to Andreas Venditti, a Zurich-based analyst at Vontobel, and Citigroup Inc. analysts Kinner Lakhani and Nicholas Herman.

Divisional Profits

Earnings from the wealth management division, which attracted 10.9 billion francs in net new assets, fell 6.8 percent in the first quarter from a year earlier to 619 million francs. Wealth management Americas posted a 24 percent jump in profit to 242 million francs. Earnings at the investment bank dropped 56 percent to 425 million francs.

“The investment bank result is not great, but at least it’s less important now,” said Wheeler.

Barclays Plc (BARC) posted a bigger-than-estimated drop in first-quarter profit today as a slump in revenue from trading bonds, currencies and commodities cut earnings from the investment bank by 49 percent.

UBS, whose annual return on equity averaged 22 percent over the seven years before it started posting losses in 2007, has struggled to revive profit as capital requirements increased. After reporting a loss in 2007, 2008, 2009 and 2012, return on equity dropped to 6.7 percent last year from 8.5 percent in 2011 and 16.7 percent in 2010. That measure of profitability stood at 8.7 percent in the first quarter.

“Our business mix and our further reduction in risk-weighted assets and balance sheet will make us totally eligible for this kind of return,” Ermotti said of the 15 percent ROE target.

UBS is expanding its wealth management business in Asia and emerging markets by hiring client advisers, Juerg Zeltner, who heads the division, excluding the U.S. and Canada, said in an interview last month. Clients are still reluctant to invest, Zeltner said.

Investment Bank

The wealth management units target a combined annual growth in pretax profit, excluding reorganization charges and asset sales, of 10 percent to 15 percent over the business cycle, UBS said today. The bank also lowered its target range for the cost-to-income ratio at each of the two divisions by five percentage points.

The investment bank’s profit dropped in the quarter as revenue slumped 21 percent while costs declined 2.3 percent. Revenue from equities trading fell 11 percent to 1.04 billion francs and foreign exchange, rates and credit posted a 38 percent decline in revenue to 382 million francs. The revenue from advisory, underwriting of stock and bond sales and financing solutions fell 23 percent to 770 million francs.

Ermotti’s Plan

JPMorgan Chase & Co. (JPM:US), Goldman Sachs Group Inc., Citigroup Inc., Bank of America (BAC:US) Corp., Morgan Stanley, Deutsche Bank AG and Credit Suisse reported a 25 percent drop in cumulative first-quarter revenue from fixed income and a 22 percent decline in equities, compared with a year earlier, data compiled by Bloomberg Industries show. The figures exclude valuation adjustments. The cumulative revenue at the firms from advising on mergers and acquisitions and underwriting of stock and bond sales fell 14 percent in the quarter, the data show.

Ermotti’s plan to bolster earnings by focusing on money-management, which requires less capital than investment banking, hinges on getting rid of assets UBS has targeted for disposal, as these so-called non-core and legacy holdings are producing losses and eating up resources. The unit’s 2.31 billion-franc pretax loss for 2013 nullified a 2.3 billion-franc pretax profit at the investment bank.

UBS said today it plans to cut risk-weighted assets at the non-core unit to about 40 billion francs by the end of 2015, compared with 55 billion francs targeted previously. The holdings amounted to 60.1 billion francs at the end of March.

Cost Cuts

While the plan for asset reductions is being accelerated, the bank said it will probably take longer than originally planned to cut costs. UBS intends to trim expenses by a net 2.1 billion francs in the corporate center from the levels of 2013, with 1.4 billion francs of the reductions by the end of 2015. UBS previously aimed to achieve all the cost cuts by then.

The remaining 700 million francs in savings will depend on when the bank fully exits the non-core assets, UBS said. It also said it will no longer provide estimates for future headcount levels after saying in 2012 it would cut 10,000 jobs to bring staff to about 54,000 worldwide.

UBS also reiterated plans to pay out more than 50 percent of earnings as dividends to shareholders once it reaches its capital goals. UBS’s common equity ratio rose to 13.2 percent at the end of March from 12.8 percent at the end of December, surpassing one of those targets.

‘Promised Payout’

UBS also aims to keep its common equity ratio at 10 percent or more after measuring the effects macro-economic and geopolitical stress events could have on capital over a one-year horizon. This post-stress ratio is currently projected to be at 9.9 percent at the end of March 2015. UBS said it expects to surpass the 10 percent target this year.

Ermotti told investors in Zurich the bank won’t retain capital that isn’t strictly necessary, adding that the payout target of more than 50 percent is “intentionally open-ended.”

“What is important for me is that they reach their targets so they can reach the promised payout ratio of 50 percent,” says Peter Stenz, who helps manage about $59 billion at Swisscanto Asset Management AG. “That could be 60 to 65 centimes a share.”

The bank’s regular dividend proposed for 2013 was 25 centimes a share.

Pretax earnings at the retail and corporate division rose 11 percent to 386 million francs, while the asset management unit recorded a 36 percent drop in earnings to 122 million francs.

Asset management attracted 9.6 billion francs in net new funds in the quarter, the most since the third quarter of 2006. The unit will aim to boost pretax profit, excluding restructuring charges and asset sales, to 1 billion francs in the medium term from profit of 576 million francs last year.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Jeffrey Vögeli in Zurich at jvogeli@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Jon Menon


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