Net income fell to 393 million Swiss francs ($427 million) from 1.66 billion francs in the year-earlier period, the Zurich- based bank said in a statement today. Earnings missed the 721 million-franc average estimate of eight analysts surveyed by Bloomberg over the past four weeks.
Chief Executive Officer Sergio Ermotti, who took over from Oswald Gruebel following the discovery of a $2.3 billion loss from unauthorized trading in September, is shrinking the investment bank as stricter capital requirements and the European sovereign debt crisis erode profitability. The bank said concerns about the crisis and the global economic outlook are “likely” to weigh on revenues this quarter as well.
“They basically gave a profit warning for the first quarter,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets, who has a “reduce” rating on UBS. “I don’t see how the bank can come out of the strategic dilemma of not having enough revenues to sustain staff at the investment bank.”
UBS fell as much as 2.7 percent, and was 18 centimes, or 1.4 percent, lower at 13.03 francs by 2:51 p.m. in Zurich, trimming its gain this year to 17 percent. That compares with an 18 percent increase in the 43-company Bloomberg Europe Banks and Financial Services Index in 2012 and a 13 percent gain at Credit Suisse Group AG.
UBS reiterated plans for a dividend of 10 centimes a share for 2011, its first cash payout since 2006.
Pretax profit at the wealth management unit rose 2 percent to 471 million francs from a year earlier, while wealth management Americas swung to a profit of 114 million francs from a loss of 32 million francs. The two units reported net new money of 5 billion francs for the quarter. Earnings at the retail and corporate unit gained 6.5 percent to 412 million francs, while asset management posted a 20 percent decline in profit to 118 million francs. The investment bank had a pretax loss of 256 million francs.
“Traditional improvements in first quarter activity levels and trading volumes may fail to materialize fully, which would weigh on overall results for the coming quarter, most notably in the investment bank,” Ermotti and Chairman Kaspar Villiger said in a letter to shareholders today.
Revenue at the investment bank slumped 36 percent to 1.8 billion francs from the year-earlier period, while operating expenses declined 4.4 percent to 1.99 billion francs.
Deutsche Bank AG, Germany’s biggest bank, last week said fourth-quarter profit dropped 76 percent as its investment bank posted a 422 million-euro ($554 million) pretax loss. Credit Suisse, which reports earnings on Feb. 9, may say profit fell 53 percent to 396 million francs in the quarter, according to the mean estimate of nine analysts surveyed by Bloomberg, who also forecast a loss at the securities unit.
UBS intends to reduce risk-weighted assets at the investment bank, run by 44-year-old Carsten Kengeter, by 145 billion francs from 300 billion francs by 2016, under Basel III rules. The company reduced risk-weighted assets by about 20 billion francs in the fourth quarter, while the investment bank cut assets by about 26 billion francs, it said.
The bank lowered its profitability target in November to a return on equity of between 12 percent and 17 percent starting in 2013, compared with a previous goal of 15 percent to 20 percent. UBS’s return on equity in 2011 was 8.6 percent.
The shift in strategy coincides with another round of management upheaval at UBS, which was ravaged by more than $57 billion of credit-related losses during the financial crisis of 2008. Ermotti, 51, who joined UBS in April, became CEO after the departure of Gruebel, 68. Villiger, 71, is leaving in 2012, a year earlier than planned, to make way for former Bundesbank President Axel Weber, 54, in the chairman role.
Since Ermotti took over, the co-heads of the equities unit, Francois Gouws and Yassine Bouhara, left, as did Chief Risk Officer Maureen Miskovic, who was at UBS for less than a year.
Kweku Adoboli, the former employee accused of causing the trading loss, pleaded not guilty to fraud and false accounting last week and was denied bail while he awaits a trial in early September. The U.K. and Swiss finance regulators also said last week that they have begun formal enforcement actions against UBS over the risk-management processes at its investment bank.
UBS cut the 2011 bonus pool, including pay deferred into future years, by 40 percent to 2.57 billion francs from 4.25 billion francs for 2010, the bank said. About 707 million francs of the pool is earmarked to be deferred.
Variable compensation at the investment bank is being reduced 60 percent, Chief Financial Officer Tom Naratil said. Investment-banking chief Kengeter volunteered to waive any variable pay entitlement, according to Ermotti.
UBS announced plans last year to cut about 3,500 jobs to help reduce annual costs by 2 billion francs by the end of 2013. That program is “on track,” Ermotti said today. UBS would trim costs further if market conditions don’t improve, he said.
“We must focus on strategic changes which go to the heart of our organizational design and structure,” Ermotti said at a press conference in Zurich. “Consistently improving efficiency has to become part of our corporate DNA. And we are working on the next phase, which will reshape our cost base in the years to come.”
UBS’s outlook is “realistic” rather than “negative,” Ermotti said, and the bank is prepared to take advantage of the situation should markets improve.
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