UBS AG Earnings Call Insights: Gross Margin Development and Potential Dividend Increases
UBS AG (NYSE:UBS) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Gross Margin Development
Sergio P. Ermotti – Group CEO: Well, let me take the last questions and then Tom will take the Wealth Management one. I think that when we look at 2012, our people have worked extremely well in executing our strategy, both in terms of capital accretion in terms of reducing cost and taking risk – controlling risks in many areas of our businesses as we just to say that we achieved record profitabilities. Last year, our performance pool was down 40%, was affected by the – (owners’ rights turning) incidence, so when we look at year-on-year performance one has to look into this strategic and objectives that we achieved. The other very important point I have to say is that, when you look at our compensation framework, we have introduced a more stringent conditions for – to make sure that a big chunk of this compensation will be different over time and is subject to sustainable performance achievements. Last, but not least, I think that comparing our comp ratio to the one of large commercial banks is like comparing apple with oranges and that I think that’s – compensation framework I do think reflects the strategic objectives we have in place.
Tom Naratil – Group CFO: So then on your question on the gross margin and activity levels in the fourth quarter in Wealth Management. So one thing that I think looking at the gross margin development that we need to take into account first is net interest margin and we’ve made a choice specifically in our replication portfolios not to extend duration in a lower interest rate environment in order to try to chase yield and we think that’s a better long-term decisions for our shareholders and we’re taking a little short-term pressure on the net interest margin to preserve the capital of our shareholders when interest rates financially are rising in. Second, if you look at the activity levels of clients in 4Q, in particular we saw a decline in transactional activity in the funds area in APAC and also in the structured product areas primarily in FX related structured products as implied volatilities dropped in the fourth quarter. We also had the seasonal effects of the holiday period in the last two weeks of the year. As we look out in terms of the – some of the comments that have been made about activity levels of retail investors, potentially picking up as market levels rise, I think it’s important for us to point out that there is – that that behavior does not necessarily correlate with what you see with Wealth Management clients and that we found the high net worth and ultra-high net worth clients in making their portfolio shifts from cash assets wherein our advisory accounts and Wealth Management we have about 28% of our client’s money in cash today. That shift from cash to riskier asset classes will become a multiyear process, not a multi-quarter process and further it requires us to see better progress on the global fiscal issues in a number of countries.
Sergio P. Ermotti – Group CEO: Let’s move to Huw van Steenis on the phone.
Potential Dividend Increases
Huw van Steenis – Morgan Stanley: Congratulations on deleveraging. It strikes to me you’re about six, maybe nine months ahead of target you put out. So I have two questions. First, in terms of the CHF5 billion of senior bonds that you’re highlighted today, I couldn’t see the CUSIP. So which particularly securities you’re buying back? Is there any indication you could give us of potential savings in net interest income and obviously if they are at par or over par potential capital hit? Then secondly with the acceleration in – successful acceleration of rundown of risk-weighted assets, how does that govern the way you think about the dividend for this year and for next year and potential dividend increases?
Sergio P. Ermotti – Group CEO: On dividend, I think that’s as we stated before we will introduce a progress of capital return policies, but the substantial steps will be done once we achieve our 13% target which we still have in light in inside of delivering by the end of 2014. At that point in time, we have committed and we will commit to at least 50% capital returns policy, but between now and then I think that it will be marginal. Tom?
Tom Naratil – Group CFO: Sure. I’ll take that one, thanks, Sergio. So here on the tender offer, we have details in the tender offers that we’ve put out in the various jurisdictions where they are active. If you look, first, there is a U.S. tender offer, that’s for a purchase of up CHF2.5 billion across seven note issues of senior unsecured securities. There is CHF12.6 billion in total outstanding in that pool. When we look at the European tender, it’s for a cash tender of up to (€2.25 billion) across another seven issues of senior unsecured where there is a total of CHF8.1 billion outstanding. I am trying to calculate what we’re going to say is obviously a little question on how we try and anticipate investor behavior in each one of the issues. I would say the best way to think about it for us we see it as neutral within the first 12 months of the year and something that has should have a range of roughly a 4 to 4.5 pay back over the life of the notes.