UBS pulls ahead of both activist and rivals

May 5, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

UBS is out in front of both activist investor Knight Vinke and its own banking rivals. The Swiss lender’s first-quarter net profit leapt 88 percent from a year earlier to 2 billion Swiss francs ($2.1 billion), way above the 1.1 billion francs pencilled in by analysts. And unlike peers, UBS’s capital strength improved on both main metrics.

Even ignoring one-off gains that boosted earnings by 745 million Swiss francs, Chief Executive Sergio Ermotti is reaping the benefits of doing radical surgery on the investment banking unit in 2012. The now vital wealth management division produced a sharply higher net margin, helped by a more disciplined approach to client discounts.

A strong showing in the streamlined investment bank also serves as a riposte to Knight Vinke, which reckons that the division receives a funding subsidy and should be spun off. A 46 percent return on allocated equity is hard to argue with. Even if the 71 percent rise in fixed income revenue was a flash in the pan – the Swiss central bank’s removal of its currency floor against the euro created huge, beneficial market volatility – the division’s return on equity would still have been around 30 percent, on Breakingviews calculations, more than double most peers’.

And UBS made its return despite keeping risk-weighted assets steady, unlike others – denting the Knight Vinke argument that trading adds dangerously to exposures. The bank operates with less than half the RWAs of Credit Suisse, the next smallest significant rival on this measure.

A potential settlement with the U.S. Department of Justice over alleged foreign exchange fixing is a reminder that there are risks. Even here, UBS provided reassurance. It reduced litigation reserves from 3 billion Swiss francs to 2.7 billion and said talks were at an advanced stage.

The bank’s capital strength is also heading in the right direction. Its ratio of Tier 1 common equity to risk-weighted assets is now at 13.7 percent, while its Basel-defined equity-to-total assets leverage metric crept higher to 3.4 percent. Investors pushed the shares up as much as 7 percent in morning trade on May 5. UBS, meanwhile, is piling pressure on less decisive competitors.

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