UBS AG (UBSN), Switzerland’s biggest bank, said it probably won’t be able to reach its profitability goal in 2015 after the Swiss regulator demanded the company hold more capital for risks related to litigation.
The bank’s ambition to reach its 15 percent return on equity target in 2015 will be delayed by at least a year unless the regulator removes its demand, the Zurich-based company said in a statement today. UBS dropped as much as 6.9 percent in Swiss trading, the biggest intraday decline since July 2012.
“There is no single item that we can point to that brought this decision,” Chief Executive Officer Sergio Ermotti said in an interview with Bloomberg Television, referring to the order to increase capital for operational risks. “It’s a variety of reasons and it’s a temporary measure. We will work hard to take this add-on away.”
UBS reported third-quarter net income of 577 million Swiss francs ($644 million) compared with the 561 million-franc average estimate of 12 analysts surveyed by Bloomberg. A 222 million-franc tax benefit helped cushion 586 million francs in provisions for litigation and regulatory matters. UBS said today it has received requests for information from various authorities investigating foreign exchange matters.
The Swiss regulator’s demand for more capital is a setback for Ermotti, who decided to exit most debt-trading businesses at the investment bank last year to boost returns. The bank, which paid about 3 billion francs in fines and settlements for litigation in the past year, said it expects “elevated charges” for legal and regulatory matters through 2014.
UBS fell 6.3 percent to 17.97 francs by 9:14 a.m. in Zurich, trimming its gain this year to 26 percent. That compares with a 31 percent increase for Credit Suisse (CSGN) Group AG and a 17 percent advance in the Bloomberg Europe Banks and Financial Services Index, which tracks 44 companies.
“We see some pressure on the share price in the short term with ongoing litigation expenses to come,” JPMorgan Chase & Co. (JPM:US) analysts Kian Abouhossein and Amit Ranjan said in a note today, adding that the delay in reaching UBS’s profitability target doesn’t change their forecasts. “Overall, the restructuring is well ahead of track both in terms of cost savings, staff reductions, and asset and risk-weighted assets reductions.”
UBS still expects to be able to boost its Basel III common equity ratio to more than 13 percent in 2014. The regulator’s demands for higher risk weightings to be assigned to litigation and compliance matters will be partially offset by the boost in capital the bank will get from repurchasing a fund from the Swiss National Bank.
Reaching that capital target is at top of the bank’s agenda for next year, Ermotti said. UBS plans to start paying out more than 50 percent of profits as dividends after it reaches the capital target.
The Swiss Financial Market Supervisory Authority’s demand adds about 28 billion francs to UBS’s risk-weighted assets and reduces the Basel III common equity ratio by 130 basis points as of Oct. 1 from 11.9 percent at the end of September, UBS said.
The bank’s plan to buy back the SNB’s fund, which was used to wind down UBS’s toxic assets from the subprime crisis, will add 100 basis points to the capital ratio, more than the company previously estimated, as the fund’s assets have shrunk to 1 million francs. A basis point is equivalent to one hundredth of a percentage point.
The regulator’s decision was based on a comparison of recent loss history with the capital underpinning operational risks, UBS said. Finma will review the situation periodically, considering provisions that the bank has made and developments in relevant legal matters. UBS had 1.74 billion francs in provisions for litigation and regulatory matters as of Sept. 30, down from 2.19 billion francs at the end of June.
Finma is among regulators worldwide probing banks for potential manipulation of currency markets. UBS has taken and will take appropriate personnel measures as it conducts an internal probe of the currency business.
UBS agreed this year to pay $885 million to settle claims that it improperly sold mortgage-backed securities to Fannie Mae and Freddie Mac. The bank was fined about 1.4 billion francs last year by the Swiss, U.S. and U.K. regulators for attempting to manipulate benchmark interest rates. It was fined last year 29.7 million pounds ($47.9 million) by the U.K. regulator for weaknesses in management systems and internal controls that were revealed as a result of Kweku Adoboli’s $2.3 billion loss in 2011 from unauthorized trading.
The Swiss regulator said at the time that it may ask UBS to increase capital levels for operational risks.
Third quarter results were “disappointing,” said Tim Dawson, a Geneva-based analyst at Helvea SA. “It’s hard to imagine investment banking and private banking results for the next few quarters being spectacularly good. But it’s important not to lose sight of how far UBS has traveled.”
Since deciding a year ago to exit most debt trading businesses, UBS has sped up its asset-reduction plan, cutting 82 billion francs, or 27 percent, of risk-weighted assets over the past 12 months.
“One year into the acceleration of our strategy, we are ahead of plan on execution,” Ermotti, 53, said in the statement.
UBS’s investment bank posted a pretax profit of 251 million francs compared with 92 million francs a year earlier. The unit is less vulnerable to swings in the debt markets that hurt the revenue of rivals including Credit Suisse in the third quarter. UBS’s revenue from equities trading rose 23 percent to 890 million francs, while revenue from foreign exchange, rates and credit fell 25 percent to 312 million francs.
Credit Suisse, the second-biggest Swiss bank, last week reported third-quarter earnings that missed analysts’ estimates as profit at the investment bank fell on a 42 percent drop in revenue from fixed-income sales and trading. The bank said it would shrink its rates business, part of the fixed-income unit, by more than 40 percent by the end of 2015 to boost returns.
JPMorgan, Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Morgan Stanley (MS:US) reported a 25 percent decline in cumulative third-quarter revenue from fixed income and a 9.7 percent gain in equities, compared with a year earlier, data compiled by Bloomberg Industries show. The figures exclude valuation adjustments.
UBS’s wealth management unit saw earnings fall 4.6 percent to 555 million francs from 582 million francs a year earlier, as the business’s gross margin, which measures how much revenue it makes on assets under management, fell 5 basis points from the second quarter to 85 basis points.
Clients’ risk appetite was “very low” in the quarter as geopolitical and macroeconomic issues escalated, Ermotti said. Increasing that risk appetite is “going to take time, it’s going to take a long time and it’s going to take a resolution for good of those matters.”
Wealth management Americas reported a 28 percent increase in pretax profit to 202 million francs, and the retail and corporate unit saw earnings increase 1.8 percent to 402 million francs, UBS said. Asset-management profit fell 6.4 percent to 118 million francs, the bank said.
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