UBS Profit Falls 58% on Investment Banking, Facebook Loss

UBS AG, Switzerland’s biggest bank, said second-quarter profit fell 58 percent, missing analysts’ estimates, as the company’s investment bank lost money on the Facebook Inc. stock sale. Net income declined to 425 million Swiss francs ($434 million) from 1.02 billion francs a year earlier, the Zurich-based bank said in a statement today. That fell short of the 1.09 billion-franc mean estimate of 11 analysts surveyed by Bloomberg.

The shares fell as UBS said Europe’s sovereign-debt crisis and doubts about the economic outlook may create further headwinds in the third quarter. Chief Executive Officer Sergio Ermotti is shrinking UBS’s investment bank by more than half to focus on wealth management as rising capital requirements and Europe’s debt woes drag on profitability.

“The investment bank has been an underperformer for a while,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets who has a reduce rating on UBS. “The more assets they cut at the unit, the lower are the chances of earnings in the future.”

The investment bank had a pretax loss of 130 million francs in the second quarter, hurt by a 349 million-franc loss tied to the Facebook stock sale. UBS said it will cut risk-weighted assets at the unit by more than previously planned.

UBS fell 5.9 percent to 10.29 francs at 9:23 a.m. in Zurich trading, extending its decline this year to 7 percent, less than the 22 percent drop by Credit Suisse Group AG. The 38-company Bloomberg Europe Banks and Financial Services Index is little changed this year.

‘Challenging’ Environment

UBS joins other banks whose results have suffered from weak markets. Deutsche Bank AG, Europe’s biggest investment bank by revenue, also reported results today, saying second-quarter pretax earnings at its securities unit slid 63 percent to 357 million euros ($439 million), missing analysts’ 835 million-euro estimate, as trading shrank amid Europe’s debt crisis. JPMorgan Chase & Co., Bank of America Corp. (BAC), Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion four years ago.

UBS Chief Financial Officer Tom Naratil told journalists on a conference call today that the market environment remains “challenging” and the bank will stay “vigilant” on costs. After announcing 3,500 job cuts last year, UBS’s further steps to improve efficiency will probably be “silent as opposed to ones that are announced with some fanfare,” he said.

Wealth Management

Earnings from wealth management fell 25 percent to 502 million francs as lower client activity hurt the bank’s margins. Pre-tax profit at the wealth management Americas unit jumped 43 percent to 200 million francs, the highest ever. The wealth management businesses attracted 13.2 billion francs of net new money in the quarter, beating analysts’ estimates.

“We are determined to extend our advantage as the best capitalized bank in our peer group under current and future regulatory requirements,” Ermotti, 52, said in a statement. “Clients recognize this and continue to entrust us with their assets.” UBS’s capital position relative to Credit Suisse may be helping it win more business from affluent clients, analysts at Espirito Santo Investment Bank said in a note last month.

“UBS’s private banking superiority is extending, underpinning our continued positive stance on the group versus Credit Suisse,” the analysts led by Andrew Lim wrote. They have a sell rating on Credit Suisse and a buy on UBS shares.

Capital Plans

UBS climbed one place from last year to be ranked the second-biggest wealth manager by assets under management after Charlotte, North Carolina-based Bank of America Corp. in a survey published this month by Scorpio Partnership, a London- based provider of research and industry analysis. Credit Suisse was ranked fifth.

Credit Suisse said this month it plans to boost capital by 15.3 billion francs this year after the Swiss National Bank urged a “marked increase.” The central bank, in its annual financial stability report, also said UBS should continue with its plan to improve capital ratios by cutting assets, retaining earnings and limiting dividend payments.

UBS is cutting risk-weighted assets at the investment-banking division to less than 135 billion francs from 300 billion francs by 2016, under Basel III rules. The bank reported a common equity ratio of 8.8 percent under fully-applied Basel III rules and said it expects this measure of financial strength to be “comfortably above” 9 percent by the end of 2012. That compares with the common equity ratio of 8.6 percent Credit Suisse now plans to achieve by then.

‘Gross Mishandling’

The new targets for risk-weighted assets, which will take UBS to less than 240 billion francs by the end of 2016, reflect “discipline around capital,” Naratil told journalists. “We feel quite comfortable that the group and the investment bank in particular can run effectively and meet its targets.”

The investment bank’s loss compared with a profit of 383 million francs a year ago, as revenue fell 32 percent to 1.72 billion francs.

The equities unit’s revenue was hurt by what UBS called a “gross mishandling of Facebook’s market debut by Nasdaq.” The bank, which entered orders for Facebook shares multiple times because Nasdaq wasn’t confirming them “for several hours,” said it will take legal action against the exchange.

Orcel, Kengeter

Andrea Orcel, 49, a former top Bank of America dealmaker, joined UBS this month to run the investment bank with 45-year-old Carsten Kengeter, focusing on strengthening the company’s advisory businesses. The division was shaken last year by the discovery of a $2.3 billion loss from unauthorized trading, which resulted in the departures of CEO Oswald Gruebel, 68, as well as co-heads of the equities business.

Ermotti told shareholders in May that the bank has taken measures to improve controls following the unauthorized trading loss to ensure the risk of a similar event is “as small as possible.” The trial of Kweku Adoboli, who pleaded not guilty to charges of fraud and false accounting, is scheduled to start in September.

UBS is also among firms including Citigroup Inc., Royal Bank of Scotland Group Plc and Deutsche Bank being investigated worldwide for practices in setting the London interbank offered rate. London-based Barclays Plc was fined a record 290 million pounds ($456 million) on June 27 for rigging Libor, leading to the resignations of CEO Robert Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry Del Missier.

UBS said previously that it received conditional immunity or leniency for cooperating with authorities including the U.S. Justice Department’s and Swiss Competition Commission’s antitrust investigations into Libor.

When asked whether the bank made provisions for possible fines in Libor probes, Naratil said UBS feels “appropriately provisioned for all matters” considered in the quarter.

Source: Bloomberg