UBS cautions gains from wealthy client activity may not last

By Joshua Franklin

ZURICH (Reuters) - A pick-up at UBS's core wealth management business is likely to weaken in the final months of 2017 as clients withdraw money to take part in tax amnesty programmes, the world's biggest private bank said.

UBS, which manages more than more than $2 trillion of the world's wealth, saw continued improvement in the third quarter at its flagship business after a sluggish 2016 in which trading activity by rich clients hit a record low.

But finance chief Kirt Gardner said the fourth quarter, traditionally a seasonally slow three months, would be hit by an estimated 8 billion Swiss francs ($8 billion) in withdrawals as wealthy customers participate in government programmes to declare offshore assets.

"We would expect that after the outflows in the fourth quarter you will see a drop-off in recurring revenue as a consequence and also reduction in margin," he said in a call with analysts on Friday.

Gardner added UBS expected to see a recovery by the second quarter of 2018.

The bank, which also has investment banking, asset management, and Swiss retail and corporate divisions, said political and monetary policy uncertainty made it cautious too.

Third-quarter group net profit came in at 946 million francs, lagging the average forecast in a Reuters survey of six analysts but ahead of the Swiss bank's own poll.

UBS shares were down 1.1 percent at 1120 GMT, a steeper drop than the European banking sector index.

'EXPECTING A LOT'

Net new money inflows - a closely watched indicator of future earnings in money management - totalled 4.6 billion francs at UBS's international wealth management unit in the third quarter.

A bright spot for the unit was the contribution from Asia Pacific, a priority growth region for UBS which has seen its best ever year-to-date performance.

UBS's North America brokerage business, which handles just over half the bank's wealth management assets, saw net outflows of $2.3 billion, a blow to a business investors hope is on an upward curve.

"The market is expecting a lot from wealth management Americas because of the good economy and the rate increases," said Mirabaud Securities Limited analyst Andreas Brun, who rates UBS's stock "buy".

The investment bank, which UBS has scaled back in recent years to free up resources for wealth management, saw adjusted pretax operating profit rise 2.9 percent to 352 million francs.

UBS's common equity tier 1 (CET1) capital ratio, an important measure of balance sheet strength which UBS uses to help decide its dividend, rose to 13.7 percent from 13.5 percent in the second quarter. A drop in the second quarter CET1 ratio had been a source of concern for some investors.

However, Brun said pending legal cases and the uncertainty over future capital rules under Basel IV regulations meant it was too soon to draw conclusions for the dividend.

"That ratio is clearly good for all those who want to make a dividend story out of UBS," said Brun. "For me it's still too early to call it a dividend story."

($1 = 0.9997 Swiss francs)

(Additional reporting by Angelika Gruber; Editing by Michael Shields, Alexander Smith and Mark Potter)