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May 1, 2008updated 04 Apr 2017 3:58pm

Q3 earnings: Clients remain jittery

Earnings performance among major private banks remains volatile. Most of the top 10 wealth managers were hit by provisions to buy back auction-rate securities after the market collapsed in February.

By John Hill

Earnings performance among major private banks remains volatile. Most of the top 10 wealth managers were hit by provisions to buy back auction-rate securities after the market collapsed in February. Their losses on the securities now total $3.2 billion. John Evans reports, research by John Hill.

Most of the major US wealth managers suffered steep declines in third quarter profit figures – much of which was accounted for by provisions relating to the buy-back of auction-rate securities (ARS).

The $330 billion market for auction-rate securities, debt securities which allowed businesses and state enterprises to raise long-term funding at short-term rates through a bidding system, froze in February leaving holders of the debt unable to sell. Since then, provisions for repurchasing ARS from customers have cost the 10 wealth managers in PBI’s survey a combined total of $3.2 billion, leading to some spectacular declines in profit figures.

Wealth industry leader UBS, one of the worst-hit by the ARS debacle, booked all of its CHF919 million ($752 million) of ARS provisions in the second quarter, meaning its third quarter earnings were more upbeat. It posted net earnings of CHF296 million in the third quarter, its first quarterly profit in a year.

Still, UBS remains vulnerable, despite its plans to raise CHF6 billion from the Swiss government and the quarantining of CHF60 billion of toxic assets to a special Swiss central bank fund.

The Swiss National Bank has been forced to warn off other banks from plundering their weakened rival, calling on them to avoid poaching customers from UBS.

Signs of recovery at UBS

UBS said, during the quarter, there were “encouraging signs for net new money flows” following the government bailout. Even so, the key wealth management business recorded outflows of CHF49.3 billion during the quarter. Profit at the wealth management and business banking unit fell 21 percent to CHF1.86 billion.

UBS chief financial officer John Cryan said while signs of stability were evident, clients may keep removing funds for some time as part of a “general trend of deleveraging. That manifests itself in clients effectively selling investments and withdrawing proceeds to pay down debt.”

Credit Suisse (CS), which has declined to participate in the Swiss government support fund, reported a third quarter loss of CHF1.26 billion after new write-downs and trading losses.

But its private bank attracted a healthy CHF14.5 billion of net new money in the quarter and made a before-tax profit of CHF789, despite ARS write-downs of €310 million ($388 million).

Despite the Swiss National Bank’s warnings, CS plans to benefit from UBS’s problems in the US, where it is subject to searching regulatory investigations over offshore tax evasion.

CS chief executive Brady Dougan, asked in an interview whether its US strategy was to replace UBS, said: “Yes, we are benefiting from an opportunity.”

Elsewhere, Julius Baer Group, in an interim statement, disclosed that net inflows in private banking were significantly above the 2007 level, supported by its strengthened franchise and with all private banking regions contributing to the increase.

Royal Bank of Scotland Group could suffer an annual loss after it announced it had been forced to write down £1.2 billion ($1.9 billion) of bad assets in the third quarter. The bank is being bailed out by the government for up to £20 billion, meaning the state will now effectively control 60 percent of the Edinburgh-based group.

While its private banking arm Coutts, like other wealth managers, has seen volatility among clients, Coutts sources have denied any suggestion of defections over confidentiality issues now the UK government is taking a major stake in the parent. It is being stressed that shareholders, whatever their origin, are “not entitled to seek access to client information”.

Most of the major US wealth managers suffered sharp declines, with Morgan Stanley the worst hit. Its $34 million loss included ARS provisions of $277 million.

Revenues at Citigroup’s Global Wealth Management division fell 10 percent in the third quarter, impacted by a decline in capital markets and investment revenues as well as falls in total client assets under management.

Client assets under fee-based management declined in the quarter by 19 percent to $41.5 billion, mainly due to lower asset valuations reflecting negative markets.

Overall, total client assets under management fell 16 percent to $1.53 trillion, after hitting a peak of $1.82 trillion in third-quarter 2007.

But client asset flows were a positive $3 billion in the quarter versus an $11 billion outflow in the previous quarter and $8 billion inflow in same-period 2007.

Third-quarter wealth management segment results

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