By Brenna Hughes Neghaiwi and Joshua Franklin | ZURICH
A long-awaited turnaround in UBS's wealth management business helped Switzerland's biggest bank deliver its second-best start to a year since the financial crisis, although it struck a cautious tone for the year ahead.
Rising interest rates, a booming stock market and better investor sentiment boosted the group's U.S. business, while improving Asian markets meant clients were more willing to take risks after a slowdown in late 2015 blunted trading appetite.
The world's largest wealth manager said on Friday net profit for the first three months of 2017 jumped 79 percent to 1.3 billion Swiss francs ($1.3 billion), beating the highest forecast in a Reuters poll.
UBS's strength contrasts with that of Swiss neighbor Credit Suisse which is recovering from back-to-back annual losses and is asking shareholders for billions of Swiss francs in fresh capital.
UBS warned, however, that while the global economy is likely to continue recovering, geopolitical tensions and 'divisive politics' could hurt confidence and business.
This was underscored by Chief Executive Sergio Ermotti in a telephone call with analysts and journalists.
One such uncertainty is Britain's departure from the European Union, something UBS said could lead to "potentially significant changes to our operations in the UK and our legal structure".
Investors nonetheless took heart although shares, which rose 3 percent in early trade, lost pace later as management underlined the uncertain outlook.
"The key highlight is a great recovery in the most important Wealth Management unit," Baader Helvea analyst Tomasz Grzelak said in a note.
"We think that this well-needed development will significantly lower investor concerns about the key UBS growth engine."
New Money Flows In
Net new money, an important indicator for future revenue in private banking, came in at 18.6 billion francs at UBS Wealth Management - a 7.6 percent rise far ahead of the bank's 3-5 percent growth target.
UBS had said it hoped optimism surrounding new U.S. President Donald Trump's proposed policies would boost its core wealth management business.
That optimism -- communicated just seven days after Trump took office in January -- translated into a 10 percent rise in transaction-based income for Wealth Management Americas, even as the unit's gross margin dipped compared to the previous quarter.
At its wealth management unit outside North America -- traditionally more profitable but facing greater pressure from negative and low interest rates -- a rebound in trading generated record revenues and profit before tax in Asia Pacific.
Gross margins in wealth management rose quarter-on-quarter for the first time in two years, a metric analysts had been looking to as an important sign of an anticipated rebound.
Meanwhile UBS's common equity Tier 1 (CET1) ratio, a closely watched measure of balance sheet strength which the bank uses as a benchmark for its dividend, rose to 14.1 percent from 13.8 percent at the end of 2016.
This moved it further ahead of Credit Suisse, which expects a CET1 ratio of around 13.4 percent even after it completes a 4 billion franc rights issue.
UBS's CET1 leverage ratio also edged up slightly to 3.55 percent, ahead of the 3.5 percent required by Swiss regulators by 2020.
The bank confirmed its target of cutting costs by 2.1 billion Swiss francs by the end of 2017 versus 2013, saying it had saved 1.7 billion francs by the end of the first quarter.
($1 = 0.9947 Swiss francs)
(Writing by Brenna Hughes Neghaiwi and John O'Donnell; Editing by Alexander Smith and Keith Weir)