UBS AG (UBSN), Switzerland's biggest bank, posted a second straight quarterly loss after booking a fine for trying to rig global interest rates and costs tied to job cuts. In fact, the performance of the bank's wealth management unit in the Americas was one of the few bright spots for UBS.
The net loss amounted to 1.89 billion Swiss francs ($2.08 billion) in the fourth quarter, compared with a 323 million- franc profit a year earlier, the Zurich-based bank said today. Analysts surveyed by Bloomberg on average estimated a loss of 2.16 billion francs.
Chief Executive Officer Sergio Ermotti is cutting 10,000 jobs over three years and exiting most debt-trading businesses to concentrate on money management and boost return on equity, a measure of profitability, to at least 15 percent in 2015. The results today presented a mixed picture: While UBS accelerated a plan to slash risk-weighted assets at the securities unit to free capital, revenue from managing money for rich clients fell short of analysts' estimates.
The bank's plan to shed assets and shrink its balance sheet “is going really well,” said Christopher Wheeler, a London- based analyst at Mediobanca SpA. “On the negative side, there'll be downgrades on the earnings because of wealth management numbers.”
UBS fell 0.5 percent to 15.57 francs by 12:42 p.m. in Swiss trading after rising 48 percent in the past six months. That compares with a 27 percent gain in the Bloomberg Europe Banks and Financial Services Index (BEBANKS), which tracks 40 companies.
The company announced plans to raise its dividend by 50 percent to 15 centimes a share for 2012 and repurchase as much as 5 billion francs of debt to lower funding costs.
The debt buyback may lead to a tightening of the bank's credit spreads and result in a ”significant” charge in the first quarter, Chief Financial Officer Tom Naratil said on a conference call. Banks book accounting charges or gains tied to the theoretical cost of buying back their own debt as market prices fluctuate.
For the full year, UBS posted a loss of 2.51 billion francs, compared with a profit of 4.14 billion francs in 2011.
Pretax profit in at the wealth management division outside the Americas fell 13 percent to 398 million francs in the fourth quarter on higher costs, while the wealth management Americas, which includes the former Paine Webber, saw earnings rise 38 percent to 201 million francs. The units added a combined 10.5 billion francs in net new money, compared with 12.3 billion francs in the previous three months.
European clients withdrew a net 4.8 billion francs in the quarter, a period during which German authorities raided homes and offices of about 100 UBS clients to examine allegations they may have hidden money in undeclared accounts.
The gross margin at the wealth management division, which reflects how much the bank makes in revenue on assets it oversees, fell to 85 basis points from 88 basis points in the third quarter. A basis point is equivalent to a hundredth of a percentage point.
“In wealth management I'm concerned about the decline in gross margins and about the outflows that negated the strong inflows in Asia,” Wheeler said. “That's disappointing.”
Naratil told journalists on a conference call the decline in gross margin was due to seasonal effects and said he's not “overly concerned” about the development. UBS still sees its target of 95 basis points to 105 basis points in wealth management gross margin as ”appropriate,” Naratil said.
In asset management, earnings rose 24 percent to 149 million francs, while profit in the retail and corporate division fell 10 percent. The investment bank had a pretax loss of 557 million francs.
Ermotti and Chairman Axel Weber, in a letter to shareholders, said that while progress was made in 2012, a “failure to achieve further sustained and credible improvements to the euro-zone sovereign-debt situation, European banking system issues, unresolved U.S. fiscal issues, ongoing geopolitical risks and the outlook for growth in the global economy would continue to exert a strong influence on client confidence and, thus, activity levels in the first quarter.”
UBS reported a common equity ratio under fully-applied Basel III rules of 9.8 percent for the end of the year, up from 9.3 percent three months earlier.
UBS cut group risk-weighted assets by 43 billion francs in the fourth quarter as it seeks to lower them by about 100 billion francs by the end of 2017. The investment bank will need three to five years to fully transform itself, Andrea Orcel, CEO of the unit, told staff at town-hall meetings in November, according to two people who heard him speak.
The bank notified about 1,900 employees of redundancies in the fourth quarter, Naratil said. Group headcount fell by 1,117 to 62,628 employees in the quarter, including a reduction of 789 at the investment bank.
More than half of the planned 10,000 job cuts will be at the investment bank, and the reorganization at UBS will result in charges of 3.3 billion francs over the next three years, the bank said in October.
UBS's bonus pool, including pay that is being deferred into future years, was cut 7 percent to 2.5 billion francs in 2012, the bank said. Part of the bonuses will be paid in contingent capital bonds, which will be written off if UBS's common equity ratio falls below 7 percent or the bank faces a bailout.
UBS was fined about 1.4 billion francs in December by regulators in the U.S., U.K. and Switzerland for altering its submissions used to set benchmarks such as the London interbank offered rate. The fine was triple the penalties levied against Barclays Plc, which had to pay 290 million pounds ($457 million) in June.
Libor, a benchmark for more than $300 trillion of financial products worldwide, is derived from a survey of banks conducted each day on behalf of the British Bankers' Association in London. Lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and francs.
The bank was also fined 29.7 million pounds in November by the U.K.'s Financial Services Authority and told by the Swiss regulator it may have to increase capital levels for operational risks after a $2.3 billion loss from unauthorized trading by Kweku Adoboli. The former trader in UBS's London office was sentenced to seven years in jail on Nov. 20 for fraud in relation to the loss, the largest from unauthorized trading in British history.
Deutsche Bank AG, Germany's biggest bank, last week reported a 2.17 billion-euro ($2.94 billion) loss for the fourth quarter on costs related to deleveraging, cutting jobs and setting aside 1 billion euros for legal expenses.