mired in $38 billion of subprime losses in Q1 2008, as jittery
clients withdrew more assets from the Swiss bank than they added
for the first time in almost eight years. After being so badly
tarnished, can UBS turn itself around?
Disclosing earnings for the first-quarter of 2008, UBS, still
ranking as the biggest global wealth manager, made it clear that it
is shifting focus away from high-risk investment banking activities
like structured finance, proprietary trading and leveraged lending
in an attempt to repair the damage to its private banking division
wrought by foray into the US credit markets.
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The group reported $19 billion in write-downs related to the credit
markets, in line with its warning in April, and an $11.5 billion
first-quarter loss. It confirmed it is exiting the US municipal
bond business and will sell a portfolio of doubtful mortgage loans
to BlackRock for $15 billion, a discount of about a third of the
portfolio’s notional value.
UBS executives also unveiled aggressive measures to reduce its
leverage and costs, setting another 5,500 job reductions over the
next year, including 2,600 already announced in its investment
banking division.
Analysts believe that UBS, which may suffer from an impaired
earnings-generating ability for several years because of the
restructuring related to subprime exposures, must move urgently to
repair the reputational damage to its $1.8 trillion global private
banking franchise.
Net new money outflows were $12 billion in the quarter compared
with inflows of $52 billion last year this time, attrition only
partly linked to lower market returns.
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By GlobalDataThe slowdown in inflows is in part “a reflection, no doubt, of the
reputational damage we have sustained,” chief financial officer
Marco Suter said. Fewer mergers and public offerings also hurt
inflows, he noted.
“In Switzerland, clients diversified assets away from UBS due to
the effects of the credit market turbulence on the company,” UBS
confessed.
Its executives sounded downbeat about the near term, stating, “We
expect this difficult environment to remain and be characterised by
a continuing unfavourable global economic climate, de-leveraging by
institutional and private investors, slower wealth creation and
lower trading and capital market activity.”
In what may prove a further blow to confidence in UBS, the group is
being investigated in the US over suspicions it may have helped
clients evade taxes. One of its senior private bankers had been
detained as part of a US Department of Justice probe into suspected
evasion. UBS has not named the executive who was briefly questioned
last month as a material witness but the Financial Times reported
that it is Martin Liechti, the Zurich-based head of the bank’s
South American and North American wealth management business.
This is the second US investigation involving UBS into the
cross-border services provided by advisers based in Switzerland to
clients in the US between 2000 and 2007. The Securities and
Exchange Commission is also examining whether advisers should have
registered with the commission as broker-dealers or investment
advisers.
Landsbanki Kepler analyst Dirk Becker said that clients have been
withdrawing money from UBS with the view that it is not a safe bank
any more, declaring, “This investigation just adds to the whole
negative picture.”
Falling profits
At UBS, pretax profits in global wealth management and business
banking fell 13 percent from the fourth quarter. In global asset
management, earnings were down 32 percent. The investment bank’s
loss totalled $18 billion for the quarter, compared with profits of
$1.5 million in the fourth quarter.
In Wealth Management International and Switzerland, the gross
margin of 101 basis points (bps) was down 1bps versus the fourth
quarter of 2007.
Net inflows of CHF2.5 billion ($2.4 billion) or 0.2 percent of
assets under management (AUM) were down from CHF33.9 billion in the
prior year – as a modest CHF5 billion international inflow offset a
CHF2.5 billion domestic outflow.
In the Business Banking Switzerland division, a CHF540 million
divisional pre-tax profit was down 10 percent on the previous
quarter. Outflows totalled CHF1.9 billion or 1.2 percent of
AUM.
In Wealth Management US operation, a CHF183 million divisional
pre-tax profit was down 12 percent, but up 18 percent year-on-year
and well ahead of analysts’ forecasts. Net inflows were CHF3.1
billion (0.4 percent of AUM), down from CHF10.9bn in first quarter
2007.
In Asset Management, a CHF330million pre-tax profit was down 32
percent versus the prior quarter. As forewarned, the division saw a
sizeable first quarter net outflow (CHF16.5 billion or 1.9 percent
of AUM), with management again acknowledging poor performance in
core equity funds.
Credit Suisse may have benefited from client business departing
from UBS or at least it has not suffered to the same extent that
UBS has, according to Guido Hoymann, an analyst at Bankhaus
Metzler. During the first quarter Credit Suisse reported net new
money inflows of CHF13.5 billion compared to CHF12 billion in the
previous quarter.
Among clearer-cut beneficiaries of the UBS outflows was Julius
Baer, which reported that it had seen a significant inflow of net
new money, “with a sustained strong contribution from private
banking” in the opening months of the year.
Bank Sarasin has seen continued inflows of client money in the
first four months of the year, though weak stock markets were a
drag on income, chief executive Joachim Straehle said.
“We benefited from the clear rise in client advisors in the first
quarter. Money inflows are as good as last year,” he said, quoted
by Swiss media. Sarasin, owned by Dutch bank Rabobank, does not
release quarterly figures. First-half 2007 net new money inflows
were CHF6 billion and assets under management stood at CHF83
billion at end-2007.
Meanwhile, UBS can expect further haemorrhage in its private
banking business although client outflows have not been on a
disastrous scale thus far, analysts say.
Realistically, the situation can only get worse because most of
UBS’s bad news came after 31 March, London-based Helvea analyst
Peter Thorne wrote in a note to investors. “This shows how bad the
reputational damage to the private bank has been from the
investment banking problems.’’
