UBS Scraps Profit Goals, Targets $2.5 Billion Cost Cuts as Earnings Slump

UBS AG (UBSN), Switzerland’s largest bank, scrapped its profit target for 2014 and announced cost cuts after second-quarter net income dropped 49 percent following a slump in earnings at the investment bank.

Net income fell to 1.02 billion Swiss francs ($1.27 billion) from 2.01 billion francs in the year-earlier period, the Zurich-based bank said in a statement today. That missed the 1.29 billion-franc mean estimate of 14 analysts surveyed by Bloomberg. UBS shares declined.

The bank plans to cut costs by as much as 2 billion francs over the next two to three years in response to what Chief Executive Officer Oswald Gruebel called a “weakening economic outlook.” Earnings at UBS’s investment bank dropped 71 percent as Europe’s sovereign debt crisis reduced revenue from the sales and trading of stocks, bonds, currencies and commodities.

“These results were disappointing, with decent results in asset gathering pulled back by another disappointing performance from investment banking,” Christopher Wheeler, a London-based analyst at Mediobanca SpA, said in a note to clients.

UBS fell as much as 3.5 percent and was down 2.7 percent to 13.53 francs as of 3:06 p.m. in Zurich trading. The stock has dropped 12 percent this year, compared with a 10 percent decline in the 46-company Bloomberg Europe Banks and Financial Services Index.

Gruebel’s Target

“While we believe we will deliver higher profitability, our target for pretax profit set in 2009 is unlikely to be achieved in the original timeframe of three to five years,” UBS said in the statement today.

The bank is reviewing all its objectives and will comment on future strategy at an investor day in November, Chief Financial Officer Tom Naratil said on a conference call. The cost-savings target isn’t a net number as the bank will continue investment in selected areas, he said. UBS’s total costs were 24.5 billion francs last year.

Gruebel, 67, may have to cut his goal for pretax profit of 15 billion francs in 2014 by as much as 20 percent, or scrap it, as tougher capital standards and sluggish markets weigh on results, analysts said before the results were released. UBS’s investment bank, which piled up 57.1 billion francs in cumulative losses during the three years through 2009, is at the heart of the dilemma over targets. The investment bank employed 17,776 people, or about 27 percent of UBS’s total staff, at the end of June.

Increasing Risk

Gruebel and Carsten Kengeter, 44, who runs the investment bank, have been trying to revive earnings at the division for two years. They hired more than 1,700 people across the investment bank and brought in new business heads, including Rajeev Misra and Yassine Bouhara, former executives at Deutsche Bank AG, Europe’s biggest investment bank by revenue, to replace people that left or were fired. They’ve also increased risk- taking to improve earnings opportunities.

The measures have brought limited benefits. UBS’s share among the nine biggest investment banks of revenue from trading stocks and bonds and advising clients on capital-market transactions and mergers doubled from 2009 to 2010, yet it remained the lowest among competitors. First-half revenue is also the lowest compared with rivals that have already reported second-quarter earnings.

Some investment-banking businesses can become bigger or smaller, Gruebel said. While more than 50 percent of what the unit does directly relates to the rest of UBS’s operations, the “big question” is how large the trading business needs to be, he said.

Turnaround Time

UBS’s turnaround is “going to take at least five years,” Ralph Silva, an analyst at Silva Research Network, said in an interview on Bloomberg Television. “Their infrastructure costs are higher than some of the other banks.”

Rival Deutsche Bank reported second-quarter profit of 1.2 billion euros ($1.74 billion), after writing down the value of Greek debt holdings. Germany’s biggest bank today confirmed a goal of 10 billion euros in operating pretax profit this year, while saying the European sovereign debt crisis will make it more difficult to reach a target at its investment bank.

Pretax profit at UBS’s investment bank slumped to 376 million francs in the second quarter from 1.31 billion francs in the year-earlier period. The unit’s cost-to-income ratio, which was the highest among the nine biggest investment banks last year, rose to 86 percent in the quarter.

Job Cuts

The investment bank, which already cut about 6 percent of jobs in the first quarter, may slash 700 more positions, mostly in the back office, a person familiar with the situation said this month. The bank may cut about 5,000 jobs across divisions to save 1 billion francs in annual costs, Swiss newspaper Tages- Anzeiger said this month, citing unidentified “insiders.”

UBS said it doesn’t envisage “material improvements” in market conditions in the current quarter and that it will probably book “significant restructuring charges” later this year.

“It is clear to us that the new capital and regulatory requirements will weigh on banking profits going forward,” Gruebel said at a presentation in Zurich. “This is a constraint for the entire banking industry, and we cannot rely on markets to boost our profits when global economic growth looks as it may have stalled.”

The bank plans cost reductions across divisions and will cut jobs, Naratil said, without providing details because the bank’s assessment was still in its “early stages.” Job cuts won’t affect client advisers in wealth management, he said.

Client Inflows

Pretax profit at the wealth management and Swiss bank fell 3.3 percent to 1.09 billion francs, while asset management posted a 7.7 percent decline to 108 million francs. Wealth management Americas swung to a profit of 140 million francs from a pretax loss of 67 million francs.

Wealth management units reported net new money of 8.2 billion francs in the quarter, while the retail and corporate division had the first outflow in three quarters of about 600 million francs. The bank’s “positive long-term net new money trends are still intact,” Naratil said.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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