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UBS CFO sees Trump bump in wealth management

Donald Trump's election as U.S. president should herald a much stronger performance in UBS Group AG's U.S. business as clients switch to higher-margin products amid rising expectations of a boost in the American economy, the bank's CFO said.

Yields on benchmark U.S. securities and stock markets have risen since Trump's election in November 2016 as markets price in a fiscal spending boom and an increase in Fed interest rates.

"A stronger U.S. economy and higher interest rates combined with the positive client sentiment … and the continued execution of our strategy should help to maintain momentum in this business," UBS CFO Kirt Gardner told analysts during the presentation of the Swiss bank's fourth-quarter 2016 results.

He said clients are indicating that they plan to take money out of lower-risk investment and invest in higher-risk opportunities.

"If that were to occur in our business, we would see an improvement both in transaction revenue as well as our nonrecurring fee revenue," he said. "You would see a flow-through quite directly in the result of our Wealth Management Americas business. I think you would also see it, a little bit less directly … in our investment banking business because that would imply that there is more institutional activity as well."

He said the U.S. equities business, which UBS is focusing on building out, should see improvements as U.S. stock markets outperform the broader market. The Dow Jones industrial average landed above 20,000 points for the first time in history on Jan. 25.

But Gardner said trends in UBS' broader asset management business are unlikely to be as positive, as the Swiss government has started sharing client data with tax authorities overseas. UBS clients pulled out CHF15.2 billion in the final three months of 2016 and margins in that business declined for a third straight quarter, a trend that the CFO warned is likely to continue.

"We are progressing in completely regularizing our portfolio in advance of the full phase-in of automated exchange of information," Gardner said. "Obviously that will continue to have an impact on our overall recurring margin. We've seen substantial risk aversion in 2016 [as] our clients moved very defensively into cash and low-risk products and we've also seen substantial movement out of active into passive as has been a trend throughout the industry."

Passive fund management, with clients investing in indexes rather than allowing "active" management of their funds, is a lower-margin business for asset managers like UBS.

Pretax operating profit in the wealth management business came to CHF368 million for the fourth quarter of 2016, compared to the year-ago CHF344 million, while profits in UBS's American wealth management division rose to CHF339 million from CHF14 million. This drove net profit attributable to shareholders down to CHF738 million from CHF949 million a year ago. The result also included provisions for litigation, regulatory and similar matters of CHF162 million, along with restructuring expenses of CHF372 million. UBS is still facing a U.S. probe into the sale of mortgage securities.

The investment banking division registered a pretax operating profit of CHF306 million, rising from CHF80 million a year earlier. Meanwhile pretax operating profit at the personal and corporate banking division rose to CHF374 million from CHF355 million.

UBS confirmed it is on track to achieve annualized net cost savings of CHF2.1 billion by the end of 2017. It achieved CHF1.6 billion in cost savings as of 2016-end, up from CHF1.1 billion at 2015-end.