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UBS Q3 net profit solid despite trading scandal

UBS Q3 net profit solid despite trading scandal
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First Published: Tue, Oct 25 2011. 01 11 PM IST

Reuters
Reuters
Updated: Tue, Oct 25 2011. 01 11 PM IST
Zurich: Swiss bank UBS AG reported a better-than-expected third-quarter net profit on Tuesday but warned the tough trading conditions that hit its investment banking income looked set to continue unless the global economy improved.
The bank said its core wealth management business had held up well despite a trading scandal announced on 15 September which had lost the bank 1.8 billion Swiss francs ($2 billion). It reported a big accounting gain which offset that loss.
Reuters
In the absence of a resolution of the euro zone debt crisis and improved US economic outlook, “current market conditions and trading activity are unlikely to improve materially, potentially creating headwinds for growth in revenues and net new money,” the bank said.
UBS said an ongoing internal investigation into the unauthorised trades uncovered last month had shown its controls had not been effective. It said it had found two control shortcomings related to trading counterparties, and that it was taking measures to address them and to improve its risk framework.
Chief financial officer Tom Naratil said the bank would take further disciplinary action if necessary.
Naratil also said the bank was working on plans to restructure the investment bank ahead of an investor day on Nov. 17 and would only give details on possible new cuts then. It announced in August 3,500 jobs would go.
“Our IB will be better aligned with our wealth management business,” he told a conference call for journalists.
Net profit fell 39% to 1.018 billion francs, beating average analyst forecasts for 276 million francs and steady from the 1.0 billion francs it posted in the second quarter, already hit by falling trading volumes.
“The figures are better than expected, even though they massaged them somewhat. But the result is still good. Wealth management is going very well and I think that will be the direction they want to push the bank in,” said one trader.
UBS shares were up 1.8% at 11.34 francs at 0712 GMT, compared with a flat European banking index .
The bank, which already said the trading scandal had not resulted in many clients withdrawing their money in the quarter, reported wealth management net inflows of 7.8 billion francs, down from 8.2 billion in the previous three months.
That included a better-than-expected 4 billion francs of net inflows in its Americas wealth management business, while the European offshore business — under pressure due to tax deals — reported net outflows.
Naratil declined to comment on client trends in the current quarter after the trading loss.
“Wealth management has not blown out the light this quarter,” said Kepler analyst Dirk Becker. “We will see how the trading incident might have further affected the group’s reputation only in the coming quarters.”
Accounting gain
Rival Deutsche Bank also reported forecast-beating third-quarter profits on Tuesday, as retail banking and asset management offset a slump in investment banking, but similarly warned that the near term outlook was highly dependent on the resolution of the euro zone debt crisis.
UBS said a 1.765 billion franc gain on the value of its own debt and 722 million from the sale of treasury-related investments helped make up for the trading loss and 387 million francs of restructuring costs it booked in the quarter.
This accounting gain — which occurs because the bank could profit from buying back its own bonds at lower levels — also gave a big boost this quarter to profits at most US banks.
However, UBS results also mirrored their US peers in showing declining bond and stock revenues as sovereign debt worries spiralled in the three months to September.
The investment bank posted a pre-tax loss of 650 million francs as it said revenues fell across all business areas due to the difficult market conditions and the strong Swiss franc.
UBS said its foreign exchange business performed well, with revenues more than doubling on high volatility and good client flows.
Vontobel analyst Teresa Nielsen said even though investment bank revenues were weak, the cost base was reduced more than expected. “We see the Q3 results as being positive in a difficult quarter,” she said.
Interim chief executive Sergio Ermotti, appointed after Oswald Gruebel quit over the trading loss, said he was finalising plans for the new UBS ahead of the investor day.
“We are committed to the implementation of the Investment Bank’s client-centric strategy, concentrating on advisory, capital markets and client flow and solutions businesses,” Ermotti and Chairman Kaspar Villiger said in a letter to shareholders.
UBS announced in August it would cut 3,500 jobs from its around 66,000 staff to shave 2 billion Swiss francs off annual costs and the bank said on Tuesday that programme was on track.
It also confirmed the reliability of its financial statements in its 2010 annual report despite the trading scandal .
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First Published: Tue, Oct 25 2011. 01 11 PM IST