UBS warns over impact of rise in Swiss franc and negative rates

UBS Group has warned over the impact of the surging Swiss franc and negative interest rates in Switzerland and the euro zone.

Switzerland’s biggest bank said a sudden move by the central bank to abandon a cap on the franc, which sent the currency surging and is set to make life difficult for Swiss financial firms and exporters, will take a toll.

“The increased value of the Swiss franc relative to other currencies, especially the US dollar and the euro, and negative interest rates in the eurozone and Switzerland will put pressure on our profitability and, if they persist, on some of our targeted performance levels,” Zurich-based UBS said in a statement on Tuesday.

The warning came as profits fell sequentially from all of the Swiss lender’s units except its investment bank, which swung to a profit before tax of 367 million Swiss francs (€351 million) from a third-quarter loss.

UBS shares slid in pre-market indications, despite the bank promising its biggest payout to shareholders since the financial crisis and its comments that it had seen a “solid” start to 2015.

UBS’s wealth management arm, put at the heart of the bank’s strategy in a three-year restructuring, won 3 billion francs in net new money, less than a third of last quarter’s result.

The unit also quietly dropped a profitability target from the unit of between 95 and 105 basis points without elaborating on the reasons. It revised several targets including a return-on-equity goal for this year, which it had previously warned it would be unlikely to reach due to a capital top-up required by its regulator, Finma.

The bank now targets a return on tangible equity, which strips out goodwill and intangible assets, of roughly 10 per cent this year, against 7.2 per cent at year-end. From next year, the bank targets ROE of more than 15 per cent. Results last year were hit by more than $1 billion to settle past scandals, as new legal woes emerged. In November, UBS agreed to pay 774 million francs to British and Swiss authorities and a US regulator to settle a probe into the attempted manipulation of foreign exchange rates.

In July, it booked a near $300 million charge mainly to settle claims it helped wealthy Germans dodge taxes. An investigation by the US department of justice (DoJ) into currency rate rigging continues and the DoJ is also examining currency-linked investments offered by Barclays and UBS, the Financial Times reported on Sunday.

UBS paid $780 million in 2009 to settle a DoJ tax-evasion probe, but said in its quarterly report that U.S. authorities had begun an investigation into the selling of certain securities that potentially violate tax law in the United States.

The bank said net profit for the fourth quarter of 2014 was 963 million francs, exceeding the 937 million francs analysts had forecast in a Reuters poll.

UBS said the earnings will allow it to pay shareholders 0.75 francs per share for the year in two separate payouts, three times more than the 2013 payout of 0.25 francs a share.

The bank had pledged to pay out more than half its profits once it reached capital levels that were achieved in 2014. The bank also completed a change in legal structure last year which allowed it to return excess capital to investors.

Reuters