UBS recovery slows in fourth quarter

(FT) -- UBS, one of Europe's hardest-hit banks in the financial crisis, reported a mixed fourth quarter as improvements in some businesses were balanced by continuing weakness in investment banking and disappointing new money flows in the powerhouse private bank.

Investment banking remained the focus of efforts to improve revenues and lower costs, as UBS revealed a 10 per cent cut in its politically sensitive 2010 bonus pool to SFr4.3bn ($4.5bn) from SFr4.8bn.

Net fourth-quarter profits for the Swiss group amounted to SFr1.29bn. Although lower than the SFr1.66bn reported in the previous three months, fourth-quarter earnings were of significantly higher quality, as they included a much lower tax credit and a substantially higher charge for changes in the value of the bank's own debt.

While third-quarter results were flattered by a surprise SFr825m tax credit, reflecting the potential available to the bank based on write-offs of more than SFr50bn in the credit crunch, there was a much more modest SFr149m credit in the fourth quarter.

For the full year, net group profits recovered to SFr7.2bn, compared with a SFr2.7bn loss in 2009, the first annual profit for four years.

Oswald Grübel, chief executive, said: "While we made substantial progress in 2010, we are fully aware that we have to continue to improve our results."

The group was cautious for 2011. Investment banking was expected to bring "some improvement" in trading results, compared with the weak second half of 2010, as aggressive efforts to rebuild the business continued to bite. But the traditionally strong advisory business was unlikely to repeat the seasonally strong fourth quarter, UBS warned.

UBS forecast that its two other divisions -- wealth and asset management, which suffered a severe reputational blow when it was revealed its managers advised US clients on how to avoid paying tax -- would rebound as recovering markets boosted client activity.

And the bank was upbeat about higher asset inflows as its reputation recovered after the credit crisis.

"We are optimistic that overall positive net new money inflows will continue in the first quarter. For the full year, we believe that net new money will strengthen noticeably," UBS said.

That positive tone followed disappointment in the fourth quarter, when net new money in the core wealth management business outside the US declined to a trickle, failing to repeat or build on the encouraging SFr1bn booked in the July-September quarter of last year. UBS revealed only that fourth-quarter net inflows had been "very small", and derived, as expected, from Asia, emerging markets and the bank's richest clients.

Pre-tax profits in wealth management remained stable at SFr488m in the fourth quarter. The investment bank reported pre-tax profits of SFr75m, compared with the third quarter's surprise SFr406m loss. UBS said revenues had improved across the entire investment bank, including the previously ailing fixed income, currencies and commodities side.

Overall, pre-tax fourth-quarter profits were SFr1.16bn, substantially higher than the SFr818m reported for the previous three months. Fourth-quarter earnings were also hit by a SFr508m charge based on accounting changes on the value of the group's own debt and a SFr164m credit charge.

Reflecting UBS's concentration on long-term stability, the group's capital ratios -- a measure of financial strength -- continued to improve significantly. Helped partly by the decision not to pay dividends, the tier one capital ratio rose by 1 percentage point to 17.7 per cent compared with the previous quarter, while the core tier one ratio -- a stricter definition -- reached 15.3 cent compared with 14.2 per cent.

By Haig Simonian, FT.com