DBRS Ratings for UBS AG Unchanged After 1Q12 Earnings; Senior at A (high)
Banking OrganizationsDBRS, Inc. (DBRS) has today commented that its ratings of UBS AG (UBS or the Group), including its Senior Unsecured Long-Term Debt rating of A (high), are unchanged following the release of the Group’s 1Q12 earnings. The trend on all ratings remains Stable. For the quarter, UBS reported net profit attributable to common shareholders of CHF 827 million, up from CHF 319 million in 4Q11.
Notable items affecting 1Q12 results were CHF 1.2 billion of own credit charges resulting from the tightening of UBS’s credits spreads over the quarter, a CHF 485 million expense reduction relating to the Group’s Swiss pension plan and CHF 126 million of net restructuring charges. Excluding these items and a CHF 53 million DVA loss on the Group’s derivatives portfolio, UBS reported an adjusted profit before tax of CHF 2.2 billion in the first quarter. This was up CHF 1.4 billion from 4Q11’s adjusted profit before tax. Adjusted operating income was CHF 7.7 billion in 1Q12, up CHF 1.6 billion from 4Q11.
Like peers, UBS’s results, especially those of the Investment Bank (IB), benefited from a much improved trading environment relative to 4Q11. Beyond this, in DBRS’s view, the Group’s results reflected several important and positive underlying trends. Wealth Management (WM) reported solid results including good asset inflows and a modestly higher gross margin. Highlighting the progress of this franchise, net new money was CHF 6.7 billion in 1Q12, above the CHF 5.9 billion quarterly average of net inflows for 2011 and a very significant improvement from the substantial outflows of 2008 and 2009. In 2009 average quarterly net new money outflows in WM were CHF 21.8 billion. Also, reflecting good progress with its strategic initiatives, Wealth Management Americas reported record pre-tax profits of USD 209 million and record levels of invested assets. In addition, UBS continued to make progress with its risk-reduction plans. Risk-weighted assets in the IB declined CHF 21 billion from 4Q11 to CHF 191 billion and are already close to targeted year-end levels.
On an adjusted basis, WM reported a 23.5% q-o-q increase in pre-tax profits to CHF 578 million. The noted asset inflows in the quarter included continued good growth in the Asia-Pacific region and among ultra high net worth clients. At period end, WM reported invested assets of CHF 772 billion, up 3% from year-end. The gross margin increased 2 bps from 4Q11 to 93 bps. DBRS notes that, with high cash balances and low leverage among clients, WM has the potential for meaningful revenue growth should markets and confidence improve.
The Retail & Corporate Banking business remained resilient in 4Q11 and UBS’s leading domestic franchise remains a key underpinning of the Group’s ratings. In the first quarter, Retail & Corporate Banking generated adjusted pre-tax profits of CHF 392 million, down CHF 28 million from 4Q11, driven by lower net interest income and higher variable compensation accruals.
The IB reported an adjusted pre-tax profit of CHF 846 million (4Q11: CHF 276 million) in the quarter on adjusted operating revenues of CHF 3.0 billion (4Q11: CHF 2.2 billion). Equities, IBD and FICC all reported higher revenues, with equity derivatives, credit, and emerging markets reporting notable rebounds from a weak fourth quarter. Despite the improved results, DBRS sees continuing challenges for the IB given still-unsettled market conditions, as well as the fact that the industry faces unprecedented levels of regulatory change. Key from DBRS’s perspective will be UBS’s ability to maintain the positive risk-adjusted trends that the IB displayed in 1Q12 in less constructive markets, while continuing to execute on its risk reduction initiatives and successfully reposition the IB. DBRS will also monitor the IB’s ability to maintain market share in its core business areas as other (somewhat related) areas are de-emphasised or exited.
The Group’s liquidity and capital remain sound, in DBRS’s view. UBS’s leading domestic banking franchise provides ample deposits to fund its lending and the global wealth management franchise provides substantial levels of U.S. dollar and Euro deposit funding. The Group also has access to well-diversified market funding for its businesses. UBS’s continued positive earnings and efforts to reduce risk weighted assets enabled the Group to continue to bolster its regulatory capital levels. UBS’s Basel 2.5 core tier 1 ratio increased 260 bps from year end to 16.7% at the end of 1Q12 and its tier 1 ratio was 18.7% at quarter end. UBS’s estimated Basel 3 common equity tier 1 ratio, under fully implemented 2019 rules, was 7.5% at 31 March, up from 6.7% at year end. DBRS notes that these capital ratios do not include the USD 2 billion of Basel 3-compliant loss-absorbing capital notes UBS issued in 1Q12. While these instruments do not receive tier 1 capital credit under Basel rules they do count towards the 6% buffer of loss-absorbing capital that UBS is targeting on top of its targeted Basel 3 tier 1 common ratio of 13%.
Notes:
All figures are in Swiss francs unless otherwise noted.
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.
The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.
This commentary was disclosed to the issuer and no amendments were made following that disclosure.
This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.
This rating is endorsed by DBRS Ratings Limited for use in the European Union.
This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.
Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 17 May 2010
Most Recent Rating Update: 20 September 2011
For additional information on this rating, please refer to the linking document under Related Research.