UBS tops profit forecast amid erratic results season

One of Switzerland’s two banking leaders, UBS, reported quarterly net income of two billion francs on Tuesday, showing the bank has been profitable since autumn 2009.

The figure was slightly lower than the 2.2 billion francs reported profit for the first three months of the year, but compares favourably with last year’s second quarter losses of some 1.4 billion.

"This was a good result in volatile market conditions, and demonstrates the progress we are making," said chief executive, Oswald Grübel in a statement.

UBS stock, listed on the Zurich exchange, rose 4.5 percent in the first hour of Tuesday trading as the figures outstripped market expectations.

"We are moving ahead with our plan and are on track to continue to improve the results of the bank," said Grubel at the results presentation in Zurich, though the official statement added some caveats.

"Concerns about the sustainability of the global economic recovery may leave markets volatile and with little direction," it said, before warning that "this could lead to more subdued client activity levels across our businesses" and lower portfolio management fee income.

The bank is recovering from the financial crisis, in which it received a 6 billion franc state bail out, and has suffered the loss of assets from clients concerned about data sharing with the US and the demise of Swiss banking secrecy.

Client outflows slowed to 4.7 billion francs during the second quarter, compared with 16 billion francs of withdrawals in the first three months and Grübel said that "during the course of this year" the bank was "pretty confident that we can stop the asset outflow".

UBS also outshone Swiss rival Credit Suisse, which last week reported a profit of 1.6 billion francs, 22 percent lower than for the first quarter of the year.

The banks confirmed they currently hold sufficient capital to deal with future economic crises.

Swiss financial regulator, FINMA, passed both institutions in a series of stress tests, according to a brief statement issued on Friday.

The tests ran for 18 months and concluded simultaneously with an assessment of 91 other banks by the EU.

FINMA said the Swiss banks were more heavily capitalized than many EU counterparts and that they would both retain at least a third more capital in the event of another recession, property collapse, or other undesirable scenarios used in the tests.

The two banks own more than a third of the publicly-listed Zurich stock exchange where some of the biggest names in corporate Switzerland have now reported their sales and profit figures for the first half of the year.

Some of the results appear to reflect a growing economy.

"Earnings seem to be dependent on GDP growth," said Christoph Riniker, head of strategy research at Zurich bank Julius Baer. "We expect benign GDP growth rates for Switzerland going forward," he said.

Last week high-tech engineering company, ABB, announced that orders grew five percent in the current reporting period.

"Demand for ABB’s industrial products and solutions continued to improve in the second quarter, reflecting the ongoing economic recovery in most regions," said the company in a statement.

A larger company, Roche, announced a 58 percent year-on-year increase in its second quarter profits.

The pharma giant is one of a group of 'defensive' stocks in the Swiss Market Index (SMI) that tend to weather the effects of economic cycles and recessionary periods.

"When overall markets are trending sideways or down, the Swiss market should do better due to its defensive sector composition," said Riniker.

But the equities strategist said he was waiting for other companies to report before casting judgment on the success of the reporting season.

"Companies which have already reported show a mixed overall picture so far when comparing reported results with latest consensus expectations," he said.

"Currently we don’t have enough results to already see a clear trend for the whole market," he added.

Riniker also pointed out that while forecasts predict the Swiss economy to grow by more than two percent this year, Swiss equities remain dependent on the health of international considerations.

Companies issuing less favourable results include Basel-based leader, Syngenta, which last week lowered annual profit forecasts after a harsh winter and higher taxes in various parts of the world hit the agrochemicals sector.

Concerns over the debts of euro zone countries and the growth rates of the Chinese and US economies have unnerved stock investors in the past thee months.

The SMI stood at 6,264 points at 10.30am on Tuesday, more than ten percent lower than its 2010 high point.

The strength of the franc can also affect Swiss equity prices. A stronger domestic currency dampens demand for exports to other countries, making Swiss companies less competitive.

But the strong currency could also work in the favour of Swiss share prices as investors look to track an index of companies with high purchasing power across international supply chains, and cash held in a currency which has appreciated against the euro and dollar this year.

"The safe haven factor will play a certain role," said Riniker, who does not expect the euro to quickly regain ground from its current value of around 1.36 francs.