UBS Profit Boosted by Tax Gain — 3rd Update

ZURICH–Swiss bank UBS AG posted a slight gain in fourth-quarter profit on Tuesday, helped by a significant tax benefit and as it sharply reduced the amount of money set aside to deal with its continuing legal and regulatory issues.

Zurich-based UBS said net profit in the quarter rose to 963 million Swiss francs ($1.04 billion), from 917 million francs in the same period a year earlier.

The bank is continuing to apply losses suffered in the wake of the financial crisis to its reported results to slash its tax liabilities and boost profit figures. For the fourth quarter, UBS said its net tax benefit was 493 million francs, higher than some analysts had anticipated and pushing the bank’s results above many estimates.

Analysts had expected Zurich-based UBS to post a net profit of 792 million francs for the quarter, according to a poll by The Wall Street Journal.

Despite the profit gain and a generally upbeat outlook, Zürcher Kantonalbank analyst Andreas Brun described the results as “negative” overall, as they relied on a strong performance from UBS’s relatively higher-risk investment bank rather than its flagship wealth management business. “We look at UBS as the biggest wealth manager [in the world], not as a big investment bank,” said Mr. Brun.

UBS said it would double its dividend payout to shareholders for 2014 from the year before to 0.50 francs. The bank signaled that it has yet to see a significantly negative effect from the Swiss central bank’s surprising decision last month to let the value of the Swiss franc rise sharply. That policy change has endangered the financial results of many Swiss banks, which report much of their costs in francs but derive significant amounts of profit in now relatively- weaker euros and dollars.

UBS warned that if the increased value of the franc persists, however, it could “put pressure on our profitability” and performance targets.

Its shares fell 2.2% in morning trading.

UBS has capped the balance sheet at its investment bank in recent years and has sought to focus more investor attention on its wealth management business. Pretax operating profit at the wealth management business rose 37% in the fourth quarter from the same period a year earlier, to 646 million francs.

However, UBS said that funds being pulled out of its wealth management business by European clients who have been declaring accounts to tax authorities in their home countries continued to offset inflows from clients in Asia. Net new money for the wealth management business in the quarter was 3 billion francs, which fell short of the bank’s target range and marked a decrease from 5.8 billion francs in the same period a year earlier.

“They’ve had a good track record in net new money growth, so hopefully this is a one-off,” Mr. Brun said. The analyst noted that UBS’s new target for annual net new money growth announced on Tuesday, of between 3% and 5%, marks an increase from its prior goal.

Pretax operating profit at UBS’s Wealth Management business in North America fell 15% to $217 million.

Pretax operating profit at UBS’s investment bank rose 24% in the quarter from the same period a year earlier to 367 million francs. The result contrasted with recent reports from several large U.S. peers. UBS said revenue from advisory services and equities trading increased.

As part of a 2012 overhaul, UBS has capped the risk-weighted assets in its investment bank at 70 billion francs– making it less than half the size of the investment bank at Swiss rival Credit Suisse Group AG. On Tuesday, UBS said risk-weighted assets allotted to the business stood at 66.7 billion francs.

Part of UBS’s reshaping of its investment bank has involved shifting unwanted business into a separate unit to be wound down. That unit, the so-called noncore and legacy portfolio, had 35.7 billion francs in risk-weighted assets in the fourth quarter, UBS said, down 44% from the same period a year earlier.

Return on equity stood at 7.6% in the quarter, UBS said, compared with its target of more than 15% for 2016. The bank’s core capital ratio was 13.4%, down slightly from the third quarter but an increase relative to the same period a year earlier.

Overall, UBS said it made 176 million francs in legal provisions in the quarter. Its results in the third quarter were weighed down by nearly $2 billion in legal provisions and new legal and regulatory issues continue to crop up.

Last week, The Wall Street Journal reported that the U.S. Justice Department had opened a new investigation into whether UBS aided U.S. tax evasion. UBS reached a deferred prosecution agreement with the Justice Department on the tax issue in 2009, which many had assumed would bring the matter to a close for Switzerland’s biggest bank. On Tuesday, UBS acknowledged the new probe, but offered few details.

In addition, UBS is being investigated by the Justice Department and other U.S. authorities regarding its role in the manipulation of foreign-exchange rates. The bank said Tuesday that those probes are ongoing and added that a recent bid to have civil litigation in the U.S. related to its foreign-exchange business dismissed was unsuccessful.

UBS has previously paid about $800 million to settle the foreign-exchange issue with European agencies and a U.S. regulator.