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UBS AG (NYSE:UBS) has posted a profit in the third quarter of 2010 and has reported positive client money flows after reporting outflows for the past several quarters. The company reported a net profit of CHF 1.7 billion ($1.7 billion) compared with CHF 2.0 billion in the prior quarter and a loss of CHF 0.6 billion in the year-ago quarter.

Operating income was CHF 6.7 billion compared with CHF 9.2 billion in the prior quarter and CHF 5.8 billion in the year-ago quarter. However, the results included a CHF 825 million net tax credit and an own credit charge of CHF 387 million.

Reduced client activity levels impacted the UBS AG business divisions’ performance. The Investment Bank division reported a pre-tax loss of CHF 406 million compared with a pre-tax profit of CHF 1.3 billion in the prior quarter. The decrease was driven by reduced flows in equities, primarily in cash and derivatives, and a decline in fixed income, currencies and commodities revenues from a decrease in average client activity in foreign exchange and rates businesses.

At the Global Asset Management division, lower management fees due to the strengthening of the Swiss franc were partially offset by lower personnel expenses; profits, therefore, were somewhat stable. Wealth Management revenues also reported a drop based on lower client activity and the strengthening of the Swiss franc against major currencies.

However, UBS AG continued with its cost controlling initiatives, resulting in a drop of CHF 731 million in expenses from the prior quarter to CHF 5.8 billion. The decline primarily stemmed from reduced personnel expenses and currency effects.

However, the company continued with its cost controlling initiatives and this resulted in a drop in CHF 731 million in expenses from the prior quarter and primarily stemmed from reduced personnel expenses and currency effects.

However, we are encouraged to see UBS AG reporting positive flows in the quarter. The company reported inflows of CHF 1.2 billion compared with outflows of CHF 4.7 billion in the prior quarter and outflows of CHF 36.7 billion in the prior-year quarter.

UBS AG reported inflows of CHF 0.9 billion of net new money for Wealth Management & Swiss Bank compared with outflows of CHF 5.5 billion in the prior quarter. Net new money inflows were CHF 0.3 billion for Wealth Management Americas compared with outflows of CHF 2.6 billion in the previous quarter.

However, Global Asset Management’s net new money inflows were zero compared with net inflows of CHF 3.4 billion in the prior quarter. Also inflows in Retail & Corporate division was slightly negative at CHF 0.1 billion, compared with outflows of CHF 0.3 billion in the previous quarter.

Invested assets remained unchanged at CHF 2,180 billion as of September 30, 2010, as market performance was offset by currency movements. UBS AG’s capital ratios improved in the quarter. Tier 1 capital ratio increased to 16.7% as on 30 September 2010 compared with 16.4% at the end of the prior quarter while core tier 1 capital ratio increased to 14.2% from 13.0% over the same period.

Outlook

UBS AG is optimistic of an improved environment in the fourth quarter. The company expects an increase in client activity levels subsequent to the abnormally low client activity levels in the third quarter and thereby expects all its business divisions to benefit from it. The company projects an increase in the transaction-based revenue in its wealth management businesses and in the flow businesses of the Investment Bank.

Additionally, UBS AG anticipates a growth in corporate transactions prior to the year-end benefiting its investment banking business and expects its wealth management units' return on invested assets to progress to some extent.

Client Detail Sharing Deal

The US Department of Justice has moved to dismiss all the prior filed charges following UBS AG meeting the terms of the Deferred Prosecution Agreement. Following the Swiss government’s promise to hand over the client details of the remaining US accounts, the US Internal Revenue Service will now withdraw the remaining portion of the John Doe summons on November 15, 2010.

Competitor Performance

Last week, UBS AG’s rival Credit Suisse Group (NYSE:CS) reported third quarter profit of 609 million Swiss francs ($633 million), compared with CHF 2.35 billion in the year ago quarter. Similar to UBS AG, Credit Suisse results reflected a drop in Investment banking revenues as a result of lower client activity. This keeps the market worrying about the other biggies which are yet to report. These include Deutsche Bank AG (NYSE:DB) and Banco Santander SA (STD).

Our Take

The global economic turmoil had a severe impact on the Swiss banking major’s balance sheet when the subprime crisis led to record losses. Additionally, the issues emanating from alleged tax evasion investigation and the dilution of Swiss banking secrecy significantly impacted UBS AG’sperformance in the past several quarters, as worried clients looked for a safer refuge.

However, with the Swiss parliament’s approval to the data sharing deal, we believe the uncertainties have somewhat been tackled. Increasing profitability and inflows remain UBS AG’stop priorities. The company has taken several restructuring initiatives, which should support its results in the upcoming quarters. Yet, we believe the volatile capital market conditions to restrict the top line growth to some extent in the near term.

Source: UBS Profits, Reports Inflow