From survive to thrive

UBS in winning struggle with its past

Two years ago, UBS seemed to have much more past than future. The Swiss bank laboured under the weight of both the investment bank's excesses during the credit boom and wealth management's standard operating procedures in the days when developed-economy governments didn't take cross-border tax evasion seriously. Preliminary second-quarter results, released on Monday, show the balance is shifting.

The past has not gone away. The outline of the results was released a week early to give the market warning of yet another big litigation charge: 865 million Swiss francs. Most of the money will be used to appease the US Federal Housing Finance Agency, which is suing 18 institutions for pushing losses from dodgy mortgages onto American taxpayers. A smaller portion relates to the cost of a settlement with UK authorities over persistent tax dodging by UBS wealth management clients.

And, the future has not yet fully arrived. The second quarter's annualised return on equity, depressed by the legal charges, looks to be a meagre 5.9 per cent. There will be more charges - 14 outstanding matters were listed in the first-quarter report. Also, it will take years to evaluate the investment bank's new "small-but-powerful" strategy, while wealth management is still more of a turnaround than a growth story. Still, the signs are positive on each of UBS' main challenges. The legal load is gradually lightening, at a manageable cost. The investment bank's results must be good - if they were unexpectedly bad, the pre-release would have mentioned that. Wealth management is attracting funds at a good clip; both in the international and the US operations. And capital ratios are rising faster than most analysts expected. One stringent measure, Basel III full implementation, increased from 10.1 to 11.2 per cent in a single quarter.

The UBS share price jumped three per cent on Monday morning, to the highest level since early 2011, and up 80 per cent from the lows of late 2011, when investors saw a bank with many liabilities and few plans. At 1.3 times book value, the shares now price in a fair amount of confidence.