UBS wealth management attracted net CHF29bn of new money in the first quarter of 2016, the highest since 2008. But, at the group level, January and February took their toll, with adjusted profit before tax of CHF1.37bn in the quarter, and a net profit of CHF707m, with annualised adjusted return on tangible equity at 8.5%. The Swiss bank noted that, 'heightened economic and geopolitical uncertainty, as well as global market volatility, led to more pronounced client risk aversion'. This translated into abnormally low transaction volumes, particularly when compared with the first quarter of last year.
Wealth management delivered an adjusted profit before tax of CHF636m, up CHF131m from the prior quarter, despite the lowest transaction volumes recorded for a first quarter, and reflecting lower net expenses for provisions for litigation, regulatory and similar matters. Net new money into wealth management amounted to CHF15.5bn, driven by net inflows from all regions, particularly Asia Pacific, and ultra-high net worth. The adjusted net margin on invested assets increased by 5 basis points to 27bp. Mandate penetration increased 60bp, to 27.0% of invested assets, said the bank.
To further boost its wealth management in Asia Pacific, the bank opened a new Shanghai branch in the middle of March, while wealth management in the Americas recorded an adjusted profit before tax of US$245m, comparing favourably with US$63m in the previous quarter. The bank attributed the improvement to lower net expenses for provisions for litigation, regulatory and 'similar matters'. Net new money was at US$13.6bn, reflecting net inflows from 'newly recruited advisors as well as from financial advisors employed with UBS for more than one year'. Wealth management financial advisors in the Americas recorded an average US$147m of invested assets and US$1.1m revenue per advisor, according to the bank.
Structured products at the investment bank fared less well over the quarter, with transaction-based income falling by CHF187m, to CHF402m, with declines across all regions, most notably in Europe and Asia Pacific. The decrease was related to investment funds, structured products and equity and fixed-income cash products, 'driven by reduced client activity due to persistent market uncertainty', said the bank.
In the retail structured products market, UBS returned to the top 10 European providers table in the first quarter 2016 with a 2% market share across 28,888 products with an estimated €866m in sales, after slipping out in 2015, according to SRP data.
During the first quarter, the bank also made structural changes to its VaR model to consistently capture residual risk of equity- and credit-related risk factors. 'The change had a pronounced impact on VaR for our portfolios containing non-linear equity derivatives, resulting in a material reduction in the regulatory VaR and stressed VaR measures,' stated the bank.
The quarterly financials included updates on investigations in the US and Switzerland, including the internal review of foreign exchange, which includes our precious metals and related structured products, following an initial media report in 2013 of widespread irregularities in FX markets that attracted investigations into the possible manipulation of FX markets, including Finma, the Swiss Competition Commission, the DOJ, the SEC, the US Commodity Futures Trading Commission (CFTC), the Board of Governors of the Federal Reserve System, the UK Financial Conduct Authority (FCA), the UK Serious Fraud Office, the Australian Securities and Investments Commission, the Hong Kong Monetary Authority, the Korea Fair Trade Commission and the Brazil Competition Authority.
'UBS has taken and will take appropriate action with respect to certain personnel as a result of its ongoing review,' said the bank. In 2014, UBS reached settlements with the FCA and the CFTC in connection with their foreign exchange investigations, and Finma issued an order concluding its formal proceedings with respect to UBS relating to its foreign exchange and precious metals businesses. The Swiss bank has paid CHF774m to these authorities, including £234m in fines to the FCA, US$290m in fines to the CFTC, and CHF134m to Finma representing confiscation of costs avoided and profits. In 2015, the Federal Reserve Board and the Connecticut Department of Banking issued an Order to Cease and Desist and Order of Assessment of a Civil Monetary Penalty Issued upon Consent (Federal Reserve Order) to UBS AG. As part of the Federal Reserve Order, UBS AG paid a USD 342 million civil monetary penalty.
In 2015, the DOJ's Criminal Division terminated the December 2012 Non-Prosecution Agreement (NPA) with UBS AG related to UBS's submissions of benchmark interest rates. 'As a result, UBS AG entered into a plea agreement with the Criminal Division pursuant to which UBS AG agreed to and did plead guilty to a one-count criminal information filed in the US District Court for the District of Connecticut charging UBS AG with one count of wire fraud in violation of 18 USC Sections 1343 and 2,' said the bank. Under the plea agreement, the bank agreed to a sentence that includes a US$203m fine and a three-year probation. The criminal information charges that between approximately 2001 and 2010, UBS AG engaged in a scheme to defraud counterparties to interest rate derivatives transactions by manipulating benchmark interest rates, including yen Libor. Sentencing is scheduled for November 29, 2016. The Criminal Division terminated the NPA based on its determination, in its sole discretion, that certain UBS AG employees committed criminal conduct that violated the NPA, including fraudulent and deceptive currency trading and sales practices in conducting certain foreign exchange market transactions with clients and collusion with other participants in certain foreign exchange markets, according to the bank.
Furthermore, the financial report highlighted the Federal Supreme Court of Switzerland ruling in 2012 that distribution fees paid to a firm for distributing third-party and intra-group investment funds and structured products must be disclosed and surrendered to clients who have entered into a discretionary mandate agreement with the firm, absent a valid waiver.
The fallout includes a Finma note to all Swiss banks which details a requirement to inform all affected clients about the Supreme Court decision and directing them to an internal bank contact for further details. Considerations taken into account include the existence of a discretionary mandate and whether or not the documentation contained a valid waiver with respect to distribution fees. UBS's balance sheet at March 31, 2016 reflected a provision 'in an amount that UBS believes to be appropriate under the applicable accounting standard'. The future outflow of resources in respect of such matters may ultimately prove to be substantially greater (or may be less) than the provision, said the bank.
Click the link for the UBS first quarter 2016 results.
Switzerland Market Review - March 2016
Swiss trade body adds to buyside membership
That Was The Week: Notes in the margin, margin in the notes
BAML leads US sales in March, 64 products linked to ETFs launched