Plummeting profits reinforce UBS caution

UBS boss Sergio Ermotti says there won't be much to look forward to in 2012 Keystone

Switzerland’s biggest bank UBS has reported a SFr3.3 billion fall in profits to SFr4.2 billion ($4.56 billion) last year in the wake of a rogue trading scandal.

The bank predicted a tough year ahead as fourth-quarter profits tumbled 76 per cent to SFr393 million. A poor investment banking performance led the decline, in common with other financial institutions.

Chief executive Sergio Ermotti put a gloss on the disappointing results by insisting that a restructuring programme at UBS would make it one of the most crisis-resistant banks in the world.

UBS announced last November that it would slash the amount of risky assets in its investment banking business by half over the course of five years and ramped up the number of intended group wide job losses from 3,500 to 3,900.

The announcement followed hard on the heels of the $2 billion rogue trading scandal that cost former CEO Oswald Grübel his job.

Rogue trader

The former UBS trader recently pleaded not guilty to two counts of fraud and two counts of false accounting after being arrested in London in September.

Swiss financial market authorities have begun enforcement proceedings against UBS over its massive rogue trading loss last year.
 
Such proceedings can result in regulators demanding changes in the way a bank operates and UBS has pledged to cooperate.

On Tuesday, Ermotti insisted that UBS is the best capitalised bank of its international peer group. He stated that further increasing the bank’s capital reserves while stripping out risky assets would be the “absolute priority” for the coming year.

“Consistently improving efficiency has to become part of our corporate DNA,” Ermotti said. “2012 is a year of transition for the group, particularly for investment banking, as we fundamentally reshape our business.”

Ermotti added that the bank was “ahead of plan” in its programme to rid itself of its riskiest assets. Staff numbers were also down by more than 1,000 from the same period last year as the cost cutting programme kicks in.

Headwinds forecast

At the results conference in Zurich on Tuesday, the bank also announced its intention to issue more than $1 billion (SFr920 million) in loss absorbing capital to further build up its buffers against future downturns.

A decision on whether to increase that amount would be taken later in the year, chief financial officer Tom Naratil said.

But UBS also admitted that it foresees “headwinds” for growth and gains in early 2012 due to Europe’s debt crisis, “budget issues” in the United States and continued uncertainty about the global economic outlook.

The continued economic turbulence and uncertainty has forced down interest rates and forced investors underground as they shun trades in favour of squirrelling their assets away in cash. UBS expects unfavourable market conditions to persist well into this year, and warned that profits might disappoint in the first three months of 2012.

The investment banking woes at UBS (which took a SFr256 million loss in the last quarter of 2011) were to some extent covered by continued flows of net new money into the bank’s wealth management divisions.

Rich clients deposited a net increase of SFr35 billion in new assets at the bank last year, a clear improvement on aggregate outflows from UBS in 2010 when its reputation was still dented from a United States tax evasion prosecution.

However, profits gained from managing these assets were reduced as clients preferred to sit on their wealth rather than make potentially risky investments.

UBS’s bumpy road

Switzerland’s biggest bank was flying high in 2007, announcing record quarterly profits of SFr5.6 billion in the second quarter of that year.
  
This figure was achieved despite the collapse of its Dillon Read Capital Management hedge fund. However the figures hid problems that only started to come to light after the sudden departure of chief executive Peter Wuffli in July of that year.
  
The profits turned into a SFr726 million loss in the third quarter as the bank started writing down subprime mortgage and debt security trades. The bank eventually lost some SFr50 billion in the financial crisis.
 
In 2008, the situation had become so bad that the Swiss National Bank was forced to bail out UBS with a SFr6 billion loan and by taking over bad debt.
 
UBS also admitted to aiding and abetting US tax evaders and was forced to pay a $780 million fine in 2008. It later had to release the names of 4,450 clients to the US authorities, denting its own reputation and Swiss banking secrecy laws.
 
Share prices fell from a high of SFr70 in 2006 to under SFr10 in 2009.
 
Former Credit Suisse boss Oswald Grübel took over as CEO in 2009 with a mandate to turn UBS around. The bank was back into the black for the full year in 2010 to the tune of SFr7.2 billion.
 
But results disappointed in 2011, leading to the bank cutting profit forecasts and 3,500 jobs.
 
In September, UBS revealed that a rogue trader had cost the bank an estimated $2 billion in unauthorised trades. The scandal forced Grübel’s resignation later in the same month.