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Swiss blotches

28 October 2014 By Dominic Elliott

UBS investors can almost see past the bank’s legal woes. The Zurich-based financial group is still paying for past sins, with a 12 month extension of a U.S. non-prosecution deal and a hefty 1.8 billion Swiss francs ($1.9 billion) addition to litigation provisions in the third quarter. But underlying businesses are now prospering.

It looks like UBS is getting close to resolving the biggest remaining legal unknown, the cost of settling allegations of rigging foreign-exchange markets. There are good reasons to believe that the global FX probe accounts for at least $1.5 billion of the additional reserve. More than 90 percent of the provisions were booked in the investment banking unit, which would bear responsibility and which has little other pending litigation. And UBS said it has discussed the case with the U.S. Department of Justice and at least one other regulator.

The greater clarity on potential legal pain is welcome, but complying with new regulations, while less expensive than flouting them, is costly. UBS will increase systems investment by almost half next year. Thanks to lower restructuring spending, it is keeping a net 700 million Swiss francs expense reduction target, but costs to achieve that will now stretch into 2017.

The best news is at the operating level. Wealth management revenue rose 11 percent year-on-year in the third quarter, which contrasts to a 1 percent fall for the same business at rival Credit Suisse. UBS’ investment banking revenue rose 13 percent as equities trading and the advisory business outshone most Wall Street peers.

The turnaround is far enough advanced that the company plans to pay out a relatively high 50 percent of earnings as dividends this year. Chief Executive Sergio Ermotti has promised even more cash if investors go along with plans to establish a holding company to help meet new capital rules.

The return on equity was a lowly 6.1 percent in the third quarter. But if UBS can make massive litigation history, much higher returns should arrive soon. As long as the cash keeps coming, UBS shareholders may be happy to wait.


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