Bloomberg News

UBS Expects ‘Modest’ Profit, Helped by Credit-Spread Gain

October 04, 2011

(Updates with CFO comments from third paragraph.)

Oct. 4 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, expects a “modest” third-quarter profit as gains from wider credit spreads and the sale of bonds cushion the $2.3 billion loss from unauthorized trading.

The bank expects a fair-value gain of about 1.5 billion Swiss francs ($1.6 billion) as its credit spreads widened in the third quarter and a 700 million-franc profit from the sale of U.S. Treasuries and U.K. gilts held in the wealth-management and Swiss bank division, the Zurich-based company said today.

UBS said last month it may be unprofitable in the quarter after discovering the losses from unauthorized trading at its investment bank. Chief Financial Officer Tom Naratil said today that “economic uncertainty” drove clients to trade less, while declines in equity markets reduced assets under management. Deutsche Bank AG, Germany’s biggest bank, today scrapped its full-year profit target after quarterly earnings at its investment bank were “significantly lower” than expected.

“The news of third-quarter profit is not as positive as it may appear at first glance because the gains UBS booked have nothing to do with normal business,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “It’s rather disappointing.”

UBS fell 1 percent to 9.99 francs at 2.55 p.m. in Zurich trading, bringing the decline in the stock since the bank announced the trading loss to 8.6 percent. That compares with a 1.7 percent decline in the 46-company Bloomberg Europe Banks and Financial Services Index over the same period.

Capital, Jobs

UBS is due to disclose detailed third-quarter earnings on Oct. 25. The bank’s capital position is “strong,” as its tier 1 ratio is expected to “decline slightly” in the quarter from 18.1 percent at the end of June, UBS said. Tax expenses will be close to zero in the quarter, it added.

The bank will also book about 400 million francs in reorganization charges after announcing in August plans to eliminate about 3,500 jobs, with about 45 percent of the reductions coming from the investment bank, as stricter capital requirements and market turmoil hurt the earnings outlook. The bank in July scrapped the target of doubling pretax profit from last year’s level to 15 billion francs by 2014.

The cost-reduction program, aimed to save the company 2 billion francs annually by the end of 2013, is “on track,” UBS said today. The bank will continue to invest in “growth regions,” including Asia-Pacific, the Americas, emerging markets and wealth management, it said.

Investment Bank

The trading loss, which resulted from positions in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, may accelerate the plans to shrink UBS’s investment bank, analysts have said. The unit will probably be unprofitable for 2011 and drag down return on equity for the bank in coming years, Morgan Stanley analysts Huw van Steenis and Hubert Lam estimated in a note yesterday.

UBS plans to make its investment bank “less complex and more focused,” Naratil, 49, told investors at a Bank of America Corp. conference in London today. The unit will in the future concentrate on “advisory, capital markets and client flow and solutions businesses,” he said, which will allow UBS to “deliver less volatile results while using less risk.”

While the bank plans to provide more details on its future strategy at an investor day on Nov. 17, Naratil said the unit will aim to boost return on equity as UBS reallocates more shareholders’ funds toward wealth and asset management.

No Strategy Changes

About three-quarters of risk-weighted assets by business under the Basel III rules resided at the investment bank, according to a pro-forma calculation for June 30. That portion will be reduced to about half of the company’s total, Naratil’s presentation slides showed.

The trading loss resulted in “no material changes” to the strategy review at the investment bank, Naratil said.

“We deeply regret the management and control mistakes that allowed the unauthorized and fictitious trading activity to occur,” he said. “We’re in the process of determining the appropriate disciplinary actions for the individuals accountable for these failures.”

Kweku Adoboli, 31, the UBS trader charged with fraud and false accounting that may have resulted in the loss, remains in custody in London. He has yet to enter a plea.

Chief Executive Officer Oswald Gruebel, 67, resigned on Sept. 24, saying the trading incident has “worldwide repercussions,” and was replaced by Sergio Ermotti, 51, on an interim basis.

Trading Losses

UBS’s long positions in DAX, EuroStoxx and S&P 500 index futures began to increase at the beginning of July, accelerating around the end of the month and peaking in early August, Naratil said. The long positions then “rapidly decreased” and were reversed into short positions in mid-August. Losses, which were “limited” until the end of July, were boosted by market declines and reached about $2 billion in mid-August, he said. They remained near that level until they were discovered and the positions closed last month, Naratil said.

UBS is cooperating with reviews by the regulators and is “committed to addressing all findings to ensure we create a risk-management framework that fully protects our bank and our shareholders,” Naratil said. It is “premature” to disclose any steps the bank plans to take to improve risk management, he said.

The bank has so far not seen a “material change” in net new money flows as a result of the trading loss, Naratil said. UBS said third-quarter wealth-management inflows were “similar” to the 8.2 billion francs reported in the previous quarter. There were “moderate” outflows from its asset- management unit, which had net new money of 1.1 billion francs in the second quarter.

“Net new money inflows in the second quarter weren’t particularly strong, and if clients were to show a reaction to the trading loss, that would happen in the fourth quarter,” Becker said.

--Editors: Dylan Griffiths, Keith Campbell.

To contact the reporter on this story: Elena Logutenkova in Zurich at

To contact the editor responsible for this story: Frank Connelly at

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