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Steady Sergio

2 May 2012 By Peter Thal Larsen

Is UBS finally becoming boring? Following its 2008 near-death experience and last year’s rogue trading scandal, the Swiss bank has promised shareholders – and clients – a more predictable, less exciting future. Respectable first-quarter results allowed new chief executive Sergio Ermotti to offer a glimpse of what might be in prospect.

Hopes of stability rest on three pillars. First, UBS’s flagship private bank is once again pulling in wealthy clients. The 6.7 billion Swiss francs ($7.4 billion) of net new money it attracted in the first three months of the year was its fifth successive quarter of substantial inflows. Even though much of the cash is coming from Asia, where intense competition allows clients to demand better prices, gross margins were more or less stable. Even UBS’s U.S. brokerage arm, a serial underperformer, turned in a record quarter.

The investment bank is the second pillar. Leaving aside accounting funnies – mostly the charge arising from narrowing spreads on UBS’s own debt – the division is holding up reasonably well. Fixed-income revenue was down just 10 percent year-on-year. And while equity trading revenue dropped 23 percent compared to the same period of last year, this is largely because it is more exposed to moribund Europe. The performance also looks better when considering that risk-taking in the investment bank has been slashed: daily value at risk in Q1 was less than half the level a year ago.

The final support is capital. UBS took advantage of the first-quarter rally to offload some balance-sheet-hogging assets. Applying new Basel III rules, its core Tier 1 capital ratio is now 7.5 percent. That’s better than rivals like Credit Suisse and Deutsche Bank – though still well short of the levels demanded by Swiss regulators.

There are plenty of potential wobbles to come. Competition from U.S. rivals and renewed euro zone turmoil could undermine the investment bank. The capital rebuild will further squeeze return on equity, which was an acceptable 13 percent in the first quarter. But investors planning to protest about pay levels at UBS’s annual meeting on May 3 shouldn’t lose perspective: if the destination is boring stability, UBS is further down the road than many.


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