Thesevere market challenges facing investment banks were underscored by fromUBS Group AG.
Profitattributable to shareholders fell sharply, to CHF707 million from CHF1.98billion, and net trading income more than halved, to CHF1.01 billion fromCHF2.14 billion. Within the investment bank, operating income declined toCHF1.88 billion from CHF2.66 billion, and pretax profit slumped to CHF370million from CHF836 million.
Recordlow levels of transaction volumes hit wealth management, asset management andinvestment banking, said CEO Sergio Ermotti, who added, nevertheless, that UBS"will not see the conditions seen in [the first quarter] as the newnormal."
Ermottisaid it would be "a major mistake" to cut costs too strongly sincethis would affect the bank's competitive position, observing in any event thatit was impossible to offset "the speed of contraction of the topline" by cost cutting. He also said UBS would not endanger the quality ofits franchise by seeking lower-quality business.
UBSbenefited in the first quarter of 2015 from very strong conditions helped bythe removal of the Swiss franc peg to the euro. But although netnew money totaled roughly CHF29 billion across the wealth management and wealthmanagement Americas divisions, the weak operating performance saw UBS sharesfall more than 7% at one stage May 3.
"Thereason the market reacted so badly is that every division was belowexpectations with the exception of the corporate center, which is not really anoperating unit," a Swiss bank analyst said in an interview."Operationally, wealth management Americas disappointed with margins whichare not even double-digit; the net margin is 9 basis points. Net new money wasvery positive but they saw outflows outside of Europe due to automaticinformation exchange."
Theanalyst said the amount of cash in the net new money was unknown and that itwas unclear therefore how much the strong inflow would actually contribute toprofits. The analyst thought, since most of the net new money came inparticular from ultrahigh-net-worth individuals in Asia, where the cashquotient is high, that the contribution to recurring profits might be small.
Despitethe impressive net new money figure, Shailesh Raikundlia, an analyst at HaitongSecurities, said UBS had suffered "quite a significant impact from marketmovement" and from foreign exchange, which more than offset the inflows. Overall,invested assets fell during the first quarter to CHF2.618 trillion fromCHF2.689 trillion in the prior quarter.
"Thisweakness in client assets is driving the revenue outlook," Raikundliasaid, observing that margins had overall held up reasonably well.
Grossmargins in wealth management fell 5 basis points year over year to 81 basispoints; in wealth management Americas they were stable over the same period at73 basis points. Both divisions saw falls in net margins, to 27basis points from 35 basis points in wealth management and to 9 basis pointsfrom 11 basis points in the Americas.
"Withrates now set to be lower for longer, it looks like gross margins are likely toremain under some pressure," Citi analysts wrote.
Meanwhile, UBS'common equity Tier 1 ratio fell 50 basis points during the quarter to 14.0%,which was attributable partly to currency effects but also to risk-weightedasset inflation. Raikundlia said the latter was likely to continue into thesecond quarter, notably because of changes to the way operating risk iscalibrated.
TheCET1 fall was "not a massive surprise but a disappointment compared toconsensus expectations," he said.
TheSwiss analyst said the stable CET1 leverage ratio at 3.3% was a letdown, whilethe CET1 ratio was disconcerting and that the market had expected a much higherfigure. "This gives rise to some caution as far as dividend growth isconcerned. I do not think that they will pay out more this year than lastyear," the analyst said.
Citianalysts, by contrast, wrote that the 4.1% Basel III leverage ratio could beboosted beyond 5% by the end of 2017 through Additional Tier 1 issuance, theuse of deferred tax assets and retained earnings. This might allow a specialdividend to be paid in 2017, they suggested.
Pressedby analysts on the dividend outlook, UBS management only repeated the currentcommitment to paying out more than half of net income while seeking to sustaina progressive policy.