UBS investment bank loss sours client money turnaround

UBS investment bank loss sours client money turnaround

Zurich: Switzerland’s biggest bank UBS reported a shock investment banking loss on sluggish trading, overshadowing the fact it has stopped bleeding client money for the first time since early 2008, a key turnaround goal.

Third-quarter net profit at UBS came in higher than forecasts although that was due to a hefty tax credit that neutralised an investment bank loss on low equities and fixed rate trading activity that has also hit other banks.

“Overall it’s a mixed bag. The net new money inflows are clearly positive coupled with a strong balance sheet," said Sarasin analyst Rainer Skierka. “On the operational side, it looks quite weak which is not that surprising given what we have seen at Credit Suisse and the other banks."

UBS was the second big European bank to report quarterly figures after local rival Credit Suisse disappointed investors last week as slow equities trading also hit its investment banking business.

“Both Swiss banks seem to have underperformed the US banks by a wide margin (in investment banking)," said Kepler Capital Markets analyst Mathias Bueeler.

Shares in UBS fell 4.9% to 16.78 francs by 02:00 pm, helping to drag the European banks index down 0.8%, reversing much of its around 9% gain so far this year after a hard fall in the credit crisis.

The weak investment banking results set a worrying trend for other European banks reporting later this week like Germany’s Deutsche Bank, as well as Spain’s BBVA and Santander.

US Tax Probe Over

UBS, which needed a government bailout in the credit crisis and was hit hard by a US tax probe, was able to attract 1.2 billion Swiss francs of new client money to its wealth management operations as Asian and super-rich clients entrusted more of their cash to UBS, though there were no net inflows into asset management.

But chief financial officer John Cryan said he still wanted to see a number of consistent and sustainable quarters of net inflows to put the difficulties of the bank’s core wealth management business behind it.

“Just because we’ve got a net positive quarter doesn’t mean that we’ve resoundingly seen a turnaround," he said.

US tax authorities had said they would withdraw a remaining summons seeking more client names on 15 November after the Swiss bank agreed last year to hand over details of thousands of wealthy American clients it helped evade taxes, UBS said.

The strength of the Swiss franc against other currencies and low client activity hit revenues in wealth management, compressing margins by 6 to 7 basis points.

International pressure on private banks only to hold assets declared to the tax man are already squeezing margins on offshore accounts by removing a key attraction over holdings kept onshore.

Chief executive Oswald Gruebel said UBS was on track to meet its medium-term goal of delivering an annual pretax profit of around 15 billion francs.

“We are optimistic that an uptick in the fourth quarter will benefit all of our business divisions. We remain confident about our future," he said.

Gruebel and chairman Kaspar Villiger were dragged out of retirement to turn around the bank, which has set up a panel to define the profile of possible successors, though the disappointing investment bank result and modest client inflows suggest Gruebel will have to stay for some time to come.

The Swiss bank’s capital position remained strong as it reported a Tier 1 ratio of 16.7%, against 16.4% at the end of the second quarter.

UBS said at the end of last month it would need to keep dividends on hold for some time to meet new capital requirements without rising capital and avoid the need to raise fresh funds.