In the first good news from UBS in a
year, the battered private banking giant said it should report a
profit for the third quarter. This is raising hopes that it could
at last be turning the corner, as long as it can stem client
outflows from its private banking operations.

UBS, bruised by the global financial crisis and deeply embroiled in
the subprime debt debacle with an accumulated $42 billion of
write-downs, is sparking hopes it could at last be over the worst
of its problems.

After working off tarnished debt and taking further measures to
restructure, the bank said it may gain market share and post a
modest profit for the third quarter of this year, returning to full
profitability in 2009. This would be its first in 2008 after losses
of about CHF11.8 billion ($10.5 billion) in the first-half of the
year.

One key to a full return of health will be a cessation of the
haemorrhage of private client outflows, which saw $40 billion flee
the UBS private banking and asset management divisions in the
second-quarter, analysts said.

Morgan Stanley analyst Huw van Steenis thinks UBS is seeing
“continued outflows and softer margins” in asset and wealth
management. It will thus “be tough for UBS to get a premium rating
until the wealth management (side) has stabilised”, he said.

Still, the analyst believes that the outlook is looking more upbeat
as much of the bad news for UBS is “on the table”. At Deutsche
Bank, analysts agreed the prospects of a third quarter profit could
be viewed as “a turning point…”

Dresdner Kleinwort analyst Stefan Stalmann cautioned that UBS could
still have a loss-making quarter ahead, possibly associated with a
large fine or settlement related to the US investigation of the
bank’s American offshore wealth business – an operation it has now
closed. Washington reports have suggested such punishment could
total as much as CHF500 million.

At shareholders’ meeting in Basel, chairman Peter Kurer declared
that UBS will return to profitability in 2009, allowing it to pay a
dividend for 2010. He said the current “precarious” markets are
likely to last into 2009 and will influence the “timing of
recovery” for UBS, amid ongoing subprime risks.

UBS’ deep restructuring, which started this year in the wake of the
bank’s asset write-downs and which centres on a strict separation
of the bank’s three key units, will continue, Kurer said. Without
providing details, UBS said it “substantially” cut its US
commercial and residential mortgage-related holdings, mainly
through disposals.

Among the uncertainties still ahead for UBS is the disclosure of US
client data to American authorities, which published reports in the
US claim is starting to take place with the co-operation of the
Swiss authorities.

However, UBS declared it will only hand over data on American
clients to the US Justice Department if Swiss authorities decide to
co-operate.

“We will only deliver names as part of any procedure designated
specifically for that,” Kurer said.

Credit Suisse ambitions

Rival Credit Suisse (CS) meanwhile is preparing an opportunistic
expansion of its global private banking operations at a time when
many rivals have been weakened by the credit crisis.

Undeterred by financial upheaval, CS plans to hire as many 1,000
private banking advisers by 2010 and declared it is now the bank of
choice for top talent.

The ambition is to “outgrow the competition, globally and in core
markets”, said Martin Mende, CS private banking’s head of business
development, during a presentation. A hiring programme of that size
would take CS’s relationship manager workforce to 4,100 by sometime
in 2010. So it needs to recruit about 330 advisers every year up to
the end of the decade. At the end of 2007, it had 3,140
advisors.

Mende stressed CS would be concentrating on top-flight talent. A
business case will have to made for each hire, based on factors
like generation of net new money and revenues. Each advisor will
have at least to hit break-even between 18 to 24 months. And the
focus will be “on pay for performance (with) limited upfront
bonus,” he said.

In the Europe, Mid-East and Africa region, where CS currently has
1,300 relationship managers, the new advisor workforce will be
needed in pursuit of a CS strategy which includes accelerating
growth in France, Germany, Italy, Spain and the UK.

HEDGE FUNDS

GAM weighs on Baer

Julius Baer moved to reassure investors over the position of its
GAM hedge fund arm, which is experiencing an accelerating departure
of investors.

The outflows have already prompted investment bank Keefe, Bruyette
and Woods (KBW) to cut its forecast earnings per share for Baer by
five percent for this year and 8 percent next year.

But Baer’s private banking inflows are expected to be positive, KBW
analyst Matthew Clark said in research note.

KBW analysed the 13 flagship funds at GAM, representing some 50
percent of the hedge fund manager’s assets under management, and
calculated an aggregate five percent negative performance in the
quarter to date. This implies outflows of 8 percent of assets under
management or equivalent to CHF2.8 billion for the sample
funds.

Clark said: “We therefore now assume a CHF6.4 billion outflow for
GAM funds in the second half of 2008 – or 9 percent of AuM.”

In contrast, Baer private banking inflows are expected to be
“buoyant” in the second half, driven by the strong hiring pipeline
by the bank. Baer private banking head Alex Widmer has previously
indicated “at least” a 10 percent net increase in advisers for
2008, bringing with them client funds.

The private banking gross margin may be vulnerable in the second
half to lower client activity. KBW forecasts a four basis points
(bps) fall to 98 bps. But it does not expect this to persist for
more than “a couple of quarters.”

GAM is meanwhile preparing to launch a distressed debt fund of
funds based on opportunistic investment in depressed debt. GAM
chief executive David M Solo said a review of the best managers is
being conducted so as to create a vehicle to “benefit from this
unique opportunity”.