UBS loss tops forecast on debt writedowns

August 12, 2008
Singapore Democrats

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Bloomberg

UBS AG, Switzerland’s biggest bank, reported a fourth straight quarterly loss on debt writedowns and the cost of settling a US probe into its sale of auction-rate securities.

The net loss was 358 million Swiss francs ($373 million) in the second quarter, compared with a profit of 5.55 billion francs a year earlier, the Zurich-based bank said in a statement today. Earnings compare with the 281 million-franc median loss estimate of 14 analysts surveyed by Bloomberg. The loss was cushioned by about 3.8 billion francs in tax credits.

Chief Executive Officer Marcel Rohner is under pressure to shrink the unprofitable investment bank and limit damage to UBS’s wealth management business, the world’s largest. Following a strategic review, UBS plans to give its three business divisions greater autonomy, backing away from an effort to integrate them after record losses at the securities unit led to net withdrawals from the private bank for the first time in almost eight years.

“The investment banking division restructuring will take months to yield results,” said Elie Darwish, an analyst at Exane BNP Paribas, in a note before the earnings. He rates UBS “underperform,” citing “wealth management brand damage.”

Rich clients withdrew 17.3 billion francs more than they added in the quarter. UBS’s wealth management units, which oversaw 1.84 trillion francs at the end of March, attracted an average of 37.9 billion francs in each quarter last year. Analysts surveyed by Bloomberg had estimated net withdrawals would amount to 5 billion francs in the second quarter.

Writedowns

Pretax profit at the wealth management international and Switzerland unit fell 11% to 1.27 billion francs, while wealth management in the US had a pretax loss of 741 million francs on provisions to settle the probe into auction-rate securities. The investment bank had a loss of 5.23 billion francs after about $US5.1 billion in writedowns.

UBS fell 50% so far this year in Swiss trading, the fourth-worst performance on the 71-company Bloomberg Europe Banks and Financial Services Index.

“UBS does not expect to see any improvement in the adverse economic and financial market trends” in the second half of the year, the bank said, adding that it will continue to reduce staffing, costs and risky assets.

The bank hired Markus U. Diethelm as group general counsel and named John Cryan as and chief financial officer.

Rohner, 43, and Chairman Peter Kurer, 59, have announced plans to cut 5,500 jobs, including 2,600 at the securities unit. Kian Abouhossein, an analyst at JPMorgan Chase & Co., said last week that UBS should eliminate an additional 15% of the investment bank’s more than 21,000 employees.

Investment bank

UBS brought in Jerker Johansson from Morgan Stanley in mid- March to run the division. Johansson, 52, in May took control of the firm’s fixed-income business from Andre Esteves, who ran it for less than 10 months and left in June.

A mistimed bet on the US mortgage market led to more than $US38 billion in writedowns at the securities unit in the nine months through March, and 25.4 billion francs of net losses, the most of any bank. UBS raised more than 30 billion francs from shareholders and investors in Singapore and the Middle East to replenish capital eroded by losses.

“UBS has had a large number of write-offs and they’ve told us on a number of occasions that this is the end of it, and it hasn’t been,” said Roger Nightingale, global strategist at Pointon York Ltd. in London, which manages about $US1.5 billion. “What they’re going to do is clear out this sort of activity and get back” to wealth management.

Wealth Management

The company’s private banking business has struggled to stem defections among advisers and wealthy clients, even as Zurich- based Credit Suisse Group AG and Julius Baer Holding AG have attracted more funds and stepped up hiring.

UBS announced yesterday that five people from its Zurich-based unit that services US clients resigned.

Credit Suisse’s wealth management unit added a net 15.4 billion francs in the second quarter, the most in two years, after hiring 120 advisers in three months. Julius Baer said wealthy clients invested 8 billion francs in the first half as 49 new relationship managers joined the firm.

UBS’s management has also been grappling with regulatory probes in the US The bank said last week it will buy back as much as $US18.6 billion ($21 billion) of auction-rate securities and pay $US150 million of fines, the largest settlement in a US

investigation into whether banks stuck clients with hard-to-sell bonds. The bank set aside about $US900 million in the second quarter to account for the settlement.

Tax Probe

UBS is also under investigation in the US over whether it helped clients evade American taxes. The bank said last month it will stop servicing accounts for American clients at units that aren’t licensed in the US, in response to an Internal Revenue Service summons for customer information as part of the tax probe. The Swiss Finance Ministry is evaluating whether UBS should go along with the IRS’s request.

Financial institutions worldwide have reported about $US493 billion of writedowns tied to the collapse of the US subprime market, and turned to investors for $US353 billion of capital, data compiled by Bloomberg show.

UBS was among the first stung by the subprime contagion when its Dillon Read Capital Management LP hedge fund, run by former investment banking chief John Costas, 51, lost 150 million francs in the first quarter of last year. By May that year, UBS decided to close it, and in July CEO Peter Wuffli, 50, stepped down.

Proposed for board

Losses also led to the departures of executives including finance chief Clive Standish, 55, and Huw Jenkins, 50, the head of the investment bank. Chairman Marcel Ospel, 58, resigned in April after shareholders demanded he take responsibility for the bank’s woes.

Kurer, in response to criticism from investors including former UBS president Luqman Arnold, 58, pledged to review the bank’s business model and bring more financial experts onto the board of directors.

UBS today said it will propose the election of Sally Bott, BP Plc’s group human resources director, Rainer-Marc Frey, founder and chairman of Horizon21, Bruno Gehrig, chairman of Swiss Life Holding AG and William G. Parrett, former CEO of Deloitte Touche Tohmatsu to the board of directors.

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