UBS ‘now out of the woods’

UBS chief executive Sergio Ermotti was pleased with his bank's performance Reuters

Switzerland’s largest bank, UBS, has ridden out the worst storm in its history after posting forecast-beating net profits of CHF3.17 billion ($3.5 billion) for 2013. It is well set to continue its good run, according to industry experts.

The bank appears finally to have shrugged off the turbulent past six years, which featured massive losses during the financial crisis, an embarrassing state bailout, a crippling tax evasion crackdown in the United States and a string of fines for market malpractice.

UBS responded to the crisis by offloading risky deals, slashing its investment banking business to a fraction of its former size, shedding thousands of staff, further reducing costs by outsourcing back-office functions and shoring up its prestigious wealth management business with an emphasis on Asia and ultra-wealthy clients.

Perhaps the lowest point in the bank’s history was the rogue trading scandal of 2011 that cost $2 billion (CHF1.8 billion), forcing the resignation of chief executive Oswald Grübel and triggering the final retreat from large-scale investment banking.

The rebuilding process has been painful and not without hiccups along the way, but it finally appears to be paying off.

“The bank is now out of the woods and showing encouraging signs of having reached a path of normality,” Sarasin bank analyst Rainer Skierka told swissinfo.ch, reflecting the view of many other observers.

Rags to riches

Last year, UBS freed itself from the 2008 state bailout by paying off the last tranche of a loan from the Swiss National Bank. That symbolic moment was followed by a stellar performance in the last three months of 2013, buoyed by rising markets, as the bank netted CHF917 million in profits – up from a CHF1.9 billion loss in the same period of 2012.

The 2012 losses were caused largely by a massive $1.5 billion fine for rigging key market interest rates, while results in the last quarter of 2013 were boosted by a CHF470 million tax credit. But analysts were still impressed with UBS’s performance even after stripping out these one-off events.

Particularly eye-catching was the performance of UBS’s slimmed-down investment banking unit that “even showed up Goldman Sachs”, according to Skierka.

Zurich Cantonal Bank analyst Andreas Brun was equally impressed at how the smaller UBS division was able to outperform Wall Street peers as markets gained momentum at the tail end of last year.

“They did particularly well in the key areas that they need to be in to support their wealth management business,” he told swissinfo.ch. “It would make sense to stay with the same size of investment banking in future.”

UBS: the crisis years

Switzerland’s largest bank, UBS, was badly hit by the 2008 financial meltdown, eventually writing down some $50 billion in losses as a result of risky investments turning sour.

In October 2008, the bank’s position has become so perilous that it was ordered to accept a bailout package from the Swiss National Bank.

The following year, UBS had to pay a $980 million fine in the US after admitted aiding and abetting tax evaders. It was also forced to hand over thousands of client files to the US authorities.

In 2011, UBS was hit with another scandal when a rogue trader racked up $2 billion is losses on bad market bets while concealing his positions from bosses. The scandal cost CEO Oswald Grübel his job.

New CEO Sergio Ermotti announced the end of large-scale investment banking, promising to ramp up job cuts to around 4,000 and slash risky assets drastically.

Since then, UBS has also been one of several major global banks at the centre of an international Libor interest rate manipulation scandal. In 2012, the bank was fined $1.5 billion by regulators for its part in the rate rigging.

The bank could still face further investigation into other market manipulation scams and tax evasion charges from European countries, most notably France.

Cautiously optimistic

UBS responded to the positive results by both recommending a hike in dividend payouts to shareholders and increasing the size of their bonus pool by 28% to CHF3.2 billion.

“A year ago, we said we would further adapt our business to better serve clients, reduce risk, deliver more sustainable performance and enhance shareholder returns,” chief executive Sergio Ermotti said in a statement.

“I am pleased to report that in 2013 we accomplished all those goals. We finished the year ahead of the majority of our performance targets and will continue to execute our strategy in a disciplined manner in order to ensure the firm’s long-term success.”

But the bank was cautious about how its success might develop in the early part of this year, highlighting a number of unresolved legal issues and continued market uncertainty, particularly given the recent turbulence in some emerging economies.

UBS could at least persuade the Swiss financial regulator that pending legal issues were not quite as serious as thought in October of last year. The Swiss Financial Market Supervisory Authority (FINMA) had then ordered UBS to add an extra CHF28 billion to the pool of money put aside to settle legal claims, but the bank has managed to chisel off CHF5 billion from this obligation.

Ahead of peers

All eyes will be on UBS’s main Swiss rival Credit Suisse, which announces its end-of-year results on Thursday. Andreas Brun believes these figures will show UBS’s performance in an even stronger light.

Like many other Swiss banks, Credit Suisse still has the threat of US legal action over tax evasion hanging over its head. Brun expects FINMA to step in with a demand for Credit Suisse to raise its pot to cover potential legal expenses.

Brun also believes UBS has been “ahead of the curve” in drastically downsizing its investment banking activities and reducing risk while Credit Suisse is still exposed to poorly performing trading segments.

“Credit Suisse will have to cut investment banking further,” he predicted.