Bloomberg News

UBS Reports 39% Drop in Quarterly Profit After Trading Loss

October 25, 2011

(Updates with analyst comment in fourth paragraph.)

Oct. 25 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, posted a smaller decline in third-quarter profit than analysts expected after an accounting gain cushioned a $2.3 billion loss from unauthorized trading.

Net income fell 39 percent to 1.02 billion Swiss francs ($1.16 billion), the Zurich-based bank said today, beating analysts’ mean estimate of 318 million francs. UBS booked an accounting gain of 1.77 billion francs, exceeding the bank’s forecast earlier this month, as its credit spreads widened.

UBS, which announced 3,500 job cuts in August, plans to scale down its investment bank and allocate more capital to wealth management. Chief Executive Officer Oswald Gruebel quit following the trading loss and Chief Financial Officer Tom Naratil told investors this month that “economic uncertainty” is driving clients to trade less.

“We see the third-quarter results as being positive in a difficult quarter,” Teresa Nielsen, an analyst at Vontobel with a “buy” rating on UBS, said in a note, adding that shareholders’ equity increased in the quarter. UBS’s Tier 1 capital ratio increased to 18.4 percent from 18.1 percent at the end of June.

UBS rose 1.7 percent to 11.33 francs by 9:34 a.m. in Swiss trading, the second-best performer on the 46-company Bloomberg Europe Banks and Financial Services Index. The bank gained 3.6 percent since it announced the loss from unauthorized trading on Sept. 15, compared with a 9.7 percent increase in index.

Wealth Management

UBS said the investment bank recorded a pretax loss, excluding the trading incident and gains on its own credit, of 566 million francs compared with a loss of 19 million francs in the year-earlier period because of a stronger franc and lower revenue across all businesses in “difficult market conditions.”

Earnings at the wealth management and Swiss bank division rose 67 percent to 1.57 billion francs, helped by a gain from the sale of bonds. Wealth management Americas reported a pretax profit of 139 million francs compared with a loss of 47 million francs, while asset management earnings fell 31 percent to 79 million francs. Wealth management businesses saw clients add a net 7.8 billion francs in the quarter, while customers withdrew 2.6 billion francs from asset management.

Potential ‘Headwinds’

The fair-value gain booked as the bank’s credit spreads widened in the third quarter was more than the 1.5 billion francs UBS estimated earlier this month. The accounting gain on own debt stems from a rule that required banks to write down the value of their debts as investors grow less confident of a company’s ability to repay them during the quarter. The gain is required under the theory that a profit would be realized if the debt were repurchased at a discount.

UBS also posted a 722 million-franc profit from the sale of U.S. Treasuries and U.K. gilts.

“Prospects for global economic growth remain largely contingent on the satisfactory resolution of euro-zone sovereign debt and banking industry concerns, as well as issues surrounding U.S. economic growth, employment and the U.S. federal budget deficit,” the bank said. “In the absence of such developments, current market conditions and trading activity are unlikely to improve materially, potentially creating headwinds for growth in revenues and net new money.”

UBS in July abandoned its goal of doubling pretax profit from last year’s level to 15 billion francs by 2014 and plans to disclose details of its new strategy at an investor day on Nov. 17 in New York.

Job Cuts

“The environment has deteriorated,” Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co., said before today’s release. “We are seeing a much lower activity level driven by market uncertainty in fixed income. Banks that are struggling more will review their strategies first.”

UBS may announce further job cuts of about 1,700 at the investment bank as well as a reduction in risk-weighted assets of 70 billion francs, Abouhossein estimated.

Naratil today didn’t rule out more job cuts, saying that the previously-announced reductions were not “strategic,” and any such changes would be announced in November. He declined to comment on net new money developments in wealth management following the trading loss. On Oct. 4, he told investors that the bank had not seen a “material change” in money flows.

The strategy review started before the bank discovered the loss from unauthorized trading and the incident didn’t introduce any “material changes,” Naratil, 49, said at a presentation in London this month.

Trading Loss

The trading loss resulted from positions in Standard & Poor’s 500, DAX and EuroStoxx index futures and has led to resignations of the co-heads of the equities unit, Francois Gouws and Yassine Bouhara, as well as suspension of a number of front office staff. Sergio Ermotti, 51, was appointed interim CEO while UBS’s board looks for a permanent successor.

Kweku Adoboli, who is accused of making unauthorized trades, last week had his case transferred to a criminal court, where he will be expected to enter a plea on the accusations at a Nov. 22 hearing. Adoboli, who has been in custody since his arrest on Sept. 15, falsified records on exchange-traded-fund transactions, prosecutors said last week. The charges also include two counts of fraud.

Control Deficiencies

Ermotti said in a memo to employees this month that while the bank’s internal systems had detected “unauthorized or unexplained” activity, it wasn’t “sufficiently” probed and controls weren’t enforced.

The bank said today it filed a document to the U.S. Securities and Exchange Commission, stating that management has determined its internal controls weren’t effective on Dec. 31 2010. UBS has taken and continues to implement measures to address the deficiencies, it said.

UBS plans to reorganize its investment bank to focus on advisory, capital markets and “client flow and solutions businesses,” to produce less volatile results with less risk, CFO Naratil told investors this month. The investment bank will aim to “contribute meaningfully” to the strengths of UBS, Carsten Kengeter, who heads the division, said in the memo to employees on Oct. 6.

“Implementation of the investment bank’s client-centric strategy will make the business less complex and more capital efficient and ensure it provides more reliable returns to our shareholders,” the bank said today.

--Editors: Dylan Griffiths, Edward Evans.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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