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UBS scraps return targets on volatility after second-quarter profit beat

The logo of Swiss bank UBS is seen on a building in Zurich, February 13, 2013. REUTERS/Michael Buholzer/File Photo

By Joshua Franklin

ZURICH (Reuters) - Switzerland's biggest bank UBS (UBSG.S) scrapped short-term guidance on profitability due to market uncertainty, even as it posted a lower second-quarter net profit that outstripped market expectations.

Shares rose as investors focussed instead on the better-than-expected bottom line.

Like many major banks, UBS is battling negative interest rates, restrained client activity and turbulent financial markets, exacerbated by Britain's vote in June to leave the European Union.

"At least until we see sustainable stabilisation across the macroeconomic and geopolitical arenas, we believe it no longer makes sense to provide short-term return guidance," Chief Executive Sergio Ermotti said in a call with analysts.

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"However, we still believe we can achieve our targets in a more normalized environment."

UBS kept its target for adjusted return on tangible equity (RoTE) - a measure of profitability - of more than 15 percent but will no longer give a timeline for the goal it had previously set at 2018. It also gave no expectations for adjusted RoTE for 2016 and 2017.

Net profit for the three months to June fell 14.5 percent to 1.034 billion Swiss francs (£804 million) from 1.2 billion francs last year due to lower earnings at its wealth management and investment banking businesses. The average estimate of five analysts polled by Reuters was 680 million francs.

UBS, which has refocused its business more towards wealth management and away from investment banking since the financial crisis, also said it had achieved 1.4 billion of its end-2017 cost-cutting target of 2.1 billion francs.

Savings helped pick up some of the slack from a drop-off in revenue, brought on by the tough trading conditions.

"UBS results are very solid, with a strong profit beat, driven by higher revenues and lower expenses and loan loss provisions than expected," Vontobel analyst Andreas Venditti, who rates the stock "buy", wrote in a note.

"Near-term targets have been dropped but market estimates are anyway clearly below the targets."

UBS shares were up 3.1 percent at 1036 London time, outpacing a 2.4 percent rise in the European banking sector index (.SX7P).

CAUTIOUS OUTLOOK

UBS said tough market conditions were "unlikely to change in the foreseeable future" but that it was well placed to benefit "from even a moderate improvement in conditions".

With reported pre-tax income in wealth management and investment banking down 31.5 percent and 48.5 percent respectively, UBS saw some growth in its personal and corporate banking business. The unit reported its best quarterly result since the end of 2008.

Second-quarter net new money inflows - seen as a volatile but important indicator of future earnings in private banking - totalled 6 billion francs at its wealth management unit and $2.4 billion at its wealth management Americas business.

The bank's common equity tier 1 capital ratio, a measure of capital strength and which UBS has set as a benchmark for its dividend, was 14.2 percent, up from 14 percent in the first quarter.

UBS aims to return at least half its profits to shareholders if it maintains capital of at least 13 percent under global rules and 10 percent when applying its own stress tests.

Results published in May prompted fears the bank may be unable to raise the payout to shareholders.

"Given prevailing market conditions," Ermotti said, "our priority for 2016 will be to deliver at least the same baseline dividend as in 2015 of 60 Rappen (0.60 francs) per share."

(Editing by Adrian Croft and Susan Thomas)