Swiss bank UBS, the world's largest wealth manager, beat forecasts with record second-quarter profits but warned that market turmoil was likely to hit its investment banking business in the second half of the year.
In an explicit warning that the upheaval in credit markets is likely to take a heavy toll, UBS said that if turbulent conditions prevailed throughout the third quarter, "UBS will probably see a very weak trading result in the investment bank."
UBS is the first big bank to comment on trading conditions since last week's havoc in financial markets forced central banks to intervene in the interbank lending market to restore order.
Its shares were down 3.6% at 63.60 francs in early trading, compared with a 0.9% decline in the Dow Jones Stoxx European banking index.
"The results are fine. It's all about the outlook. You have some earnings downgrades coming," said Kinner Lakhani at ABN Amro. "It shows the extent of the drag from the investment bank, another example of the tail wags the dog."
UBS drew a line under its hedge fund, Dillon Read Capital Management, which it said was closing in May after running up big losses. It said there would be no further costs after it took a pretax charge of 384 million francs in the second quarter.
The bank also said it had paid back 1.5 billion francs to outside investors following the closure.
Net second-quarter net group profit rose to 5.622 billion francs ($4.7 billion) from 3.147 billion in the second quarter of 2006 and 3.275 billion in the first quarter. It exceeded an average forecast of 4.751 billion by 11 analysts in a Reuters poll.
The result included a 1.926 billion franc windfall from the sale in June of UBS's 20.7% stake in Swiss private bank Julius Baer.
Asset Management Bulwark
The results are the first to be unveiled since Peter Wuffli's abrupt departure and replacement as chief executive officer in early July by Marcel Rohner, who formerly ran the bank's wealth management business.
Rohner said he was comfortable with the level of the bank's exposure in leverage finance with a market share of about 4%. He also said trading in U.S. mortgage-backed securities market was satisfactory.
"In July we have experienced significant dislocation in the U.S. mortgage market, but we have had a satisfactory trading result," Rohner told a conference call with journalists.
The bank said its traditional strength in wealth and asset management would help see it through the second half, with weaker investment banking results "offset by predictable earnings from wealth and asset management."
Rohner said the second-quarter results were outstanding even with the windfall from the sale of Julius Baer stripped out.
"It is a record result even if we exclude the contribution from our sale of our stake inJulius Baer. We have 3.455 billion, which is the best ever quarterly performance."
Net new money in wealth management was 35.2 billion francs, ahead of the average forecast for 32.2 billion.
Profits were boosted by record net fee and commission income of 8.099 billion francs, a rise of 26% over the same quarter last year.
Analysts had expected UBS to have an exceptional quarter in cash equities and derivatives trading but had been nervously waiting to find out whether the bank would take more charges from Dillon Read.