Swiss banking giant UBS reported that its third quarter profit was down 21% from the same period last year to 2.2 billion Swiss francs ($1.98 billion), as trading businesses lagged.

Net profit from continuing operations was down 15%. Financial businesses contributed CHF 2.1 billion to attributable net profit from continuing operations. This is 30% lower than second quarter 2006 and 16% below the third quarter 2005 result. Operating income fell 13% from second quarter 2006, in the context of weaker markets and in the absence of disposal gains, which benefited results in second quarter.

“We felt the effects of the May and June market correction in the first part of this quarter as sentiment did not really improve until September – which is why we were not able to match the very strong performance in the first half,” said Clive Standish, UBS chief financial officer.

It said that weaker revenues from trading activities, mainly in the equities and rates businesses in the investment bank, were offset by improvements in other areas, such as fee and commission income, which comprised 58% of overall operating income in the third quarter.

Asset-based fees increased in both wealth and asset management, reflecting strong net new money inflows and higher market levels. The investment bank generated strong revenues in its advisory and debt underwriting businesses. Debt capital markets recovered significantly from a year earlier. The mergers and acquisitions environment was vigorous. Notable transactions included advising Companhia Vale do Rio Doce on its acquisition of Inco.

Net income from interest margin products rose on higher margin lending volumes in the wealth management businesses and the continued growth of the Swiss mortgage business, as well as from wider spreads on client deposits.

Net income from trading activities was down 15% from a year ago. Equities trading income declined 25%, as markets in third quarter were relatively quiet in contrast to a year earlier – when they were exceptionally buoyant. Fixed income trading revenues also decreased 15%, reflecting a fall in derivatives trading in the US and Europe, partly offset by resilient client-driven revenues in the rates business.

Looking ahead, the bank said that, “A discernible pick-up in market activity in September has carried over into a good start to the fourth quarter. Equity indices have climbed to new records. Short-term expectations for economic growth are positive, industry deal pipelines and investor confidence intact. UBS’s competitive strength will allow it to capture revenue opportunities around the world while it continues to execute strategy and invest in its areas of focus.”

“Developments in the world’s financial markets – which remain an important driver in many of UBS’s businesses – are never fully predictable. Thanks to the strong performance in the first half of 2006 and the resilience of UBS’s revenues through a difficult summer, results for the first nine months are significantly stronger than in the same period a year ago,” it said. Financial businesses net profit (from continuing operations) in the nine months to September 30 was CHF 8.2 billion, up 20% from a year earlier.

“At this point, it looks as though we will remember 2006 as another record year for UBS – in terms of both financial results and strategic progress,” said Standish.

(1 Swiss franc = 90¢)