July 29, 2016 / 5:01 AM / a year ago

UBS scraps profitability guidance as uncertainty reigns

The logo of Swiss bank UBS is seen on a building in Zurich, February 13, 2013.Michael Buholzer/File Photo

ZURICH (Reuters) - UBS (UBSG.S), Switzerland's biggest bank, has scrapped short-term guidance on profitability due to an increasingly murky outlook for financial markets, even though its second-quarter net profit fell much less than analysts had feared.

Shares in the world's biggest private bank rose as investors focused on the quarterly result and progress in cutting costs.

Like many rivals, UBS is battling negative interest rates, a drop in trading by clients, and turbulent financial markets, exacerbated by Britain's June vote to leave the European Union.

"At least until we see sustainable stabilization across the macroeconomic and geopolitical arenas, we believe it no longer makes sense to provide short-term return (on equity) guidance," CEO Sergio Ermotti said in a call with analysts on Friday.

"However, we still believe we can achieve our targets in a more normalized environment."

UBS kept its target for adjusted return on tangible equity (RoTE) - a measure of profitability currently at 10.1 percent - of more than 15 percent, but will no longer give a timeframe for the goal and gave no expectations for 2016 and 2017.

UBS adopted the target at the start of 2015 and originally hoped to hit it from 2016. This was later pushed back to 2018.

Analysts' estimates for UBS's RoTE over this period were already below 15 percent, according to Vontobel analyst Andreas Venditti, who rates the stock "buy".

UBS's net profit for the three months to June fell 14.5 percent to 1.03 billion Swiss francs ($1.1 billion) due to lower earnings at its wealth management and investment banking businesses. The average estimate of five analysts polled by Reuters was for 680 million francs.

UBS, which has refocused its business more toward wealth management and away from investment banking since the financial crisis, said it had achieved two-thirds of its target to cut costs by 2.1 billion francs by the end of 2017.

Savings helped pick up some of the slack from a drop-off in revenue, brought on by the tough trading conditions.

"Revenue is not really predictable," said Venditti. "That's why the important thing is bringing costs down and Q2 was positive from that side but a lot more still needs to come."

UBS shares were up 2.6 percent at 1240 GMT, in line with the European banking sector index .SX7P.

CAUTIOUS OUTLOOK

UBS said tough market conditions were unlikely to change in the foreseeable future but it was well placed to benefit "from even a moderate improvement in conditions". This echoed a similarly cautious outlook on Thursday from rival Credit Suisse (CSGN.S).

Reported pretax income in wealth management and investment banking fell 31.5 percent and 48.5 percent respectively, but UBS saw growth in its personal and corporate banking business, which had its best quarterly result since the end of 2008.

Second-quarter net new money inflows - a volatile but important indicator of future earnings in private banking - totaled 6 billion francs at its wealth management unit and $2.4 billion at its wealth management Americas business.

The bank's common equity tier 1 capital ratio, a measure of capital strength which UBS uses as a benchmark for its dividend, rose to 14.2 percent from 14 percent in the first quarter.

UBS aims to return at least half its profits to shareholders if it maintains capital of at least 13 percent under global rules and 10 percent when applying its own stress tests.

Results published in May prompted fears the bank may be unable to raise the payout to shareholders.

"Given prevailing market conditions," Ermotti said, "our priority for 2016 will be to deliver at least the same baseline dividend as in 2015 of 60 Rappen (0.60 francs) per share."

Ermotti said it was too early to speculate what impact Britain's vote to leave the EU would have on UBS's presence in London, where it has sizeable investment banking operations.

"If and when it's necessary to think about how to relocate parts of our investment banking business base in London, it will really depend on the passporting rights of UK-based entities," he said, referring to an arrangement letting business regulated in member states sell financial services across the EU.

"We have existing local presences in continental Europe that would be able to accommodate such a move and we would eventually even exploit opportunities in new locations."

Editing by Susan Thomas and Mark Potter

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