UBS Profit Falls 58% on Investment Banking, Facebook Loss

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UBS Profit Falls 58% on Investment Banking, Facebook Loss
The headquarters of UBS in Zurich. Photographer: Gianluca Colla/Bloomberg

UBS AG, Switzerland’s biggest bank, said second-quarter profit fell 58 percent, missing analysts’ estimates, as the investment bank posted a loss tied to Facebook Inc.’s initial public offering.

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 dropped 5.9 percent as UBS said Europe’s sovereign-debt crisis and doubts about the economic outlook may further constrain revenue growth 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, run by Carsten Kengeter and Andrea Orcel, who joined this month, had a pretax loss of 130 million francs in the second quarter, hurt by a 349 million-franc loss related to the Facebook offering. UBS said it will cut risk-weighted assets at the unit by more than previously planned.

‘Challenging’ Environment

UBS fell 64 centimes to 10.29 francs in Zurich trading, extending its decline this year to 8 percent. The 38-company Bloomberg Europe Banks and Financial Services Index fell 0.8 percent this year.

UBS joins other banks whose results have suffered from weak markets. Deutsche Bank AG, Europe’s biggest investment bank by revenue, said today that second-quarter pretax earnings at its securities unit slid 63 percent to 357 million euros ($439 million), missing analysts’ estimates, as trading shrank amid Europe’s debt crisis.

JPMorgan Chase & Co., Bank of America Corp., 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.

Cost Cuts

UBS will further adjust costs for the group and its investment bank to the environment, Ermotti said at a press conference in Zurich. The bank already cut total annualized expenses by 1.1 billion francs in the first half from a year ago and reached its 2013 headcount reduction target at the securities unit, Ermotti said.

“We are not resting there,” he said. “Costs are clearly a must in terms of focus in this challenging environment.”

Chief Financial Officer Tom Naratil told journalists on a conference call that after announcing 3,500 job cuts last year, further steps to improve efficiency will probably be “silent as opposed to ones that are announced with some fanfare.”

Earnings from wealth management outside the Americas fell 25 percent to 502 million francs as lower client activity hurt the bank’s margins. Pretax 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.

Affluent Clients

“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 led by Andrew Lim said in a report last month. They have a sell rating on Credit Suisse and a buy on UBS shares.

UBS was the No. 2 ranked 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. The bank climbed one place from last year. Credit Suisse was ranked fifth.

Capital Plans

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.

UBS’s “excellent capital position and further shrinkage are welcome,” JPMorgan analysts led by Kian Abouhossein said in a note today. They have an overweight rating on the company.

UBS, which paid its first cash dividend to shareholders since the subprime crisis this year, will be improving payouts in line with progress on the capital build-up, Ermotti said. The bank accrued a dividend in the first two quarters of 2012, though the final decision will be made after results for the full year are known, he said.

‘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.”

UBS is sacrificing some revenue opportunities at the investment bank as it cuts assets and builds up capital, Ermotti said. The unit also needs “a normal market environment” to achieve its return on equity target of between 12 percent and 17 percent, he said.

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.

Revenue at the equities unit was hurt by what UBS called a “gross mishandling of Facebook’s market debut by Nasdaq.” The bank said it had to enter clients’ orders for Facebook shares multiple times because Nasdaq wasn’t confirming them “for several hours.” That left UBS with a surplus of Facebook stock, which subsequently dropped. The shares touched a record intraday low of $21.70 today, down from the $38 IPO price. UBS said it will take legal action against the exchange.

Orcel, Kengeter

Orcel, 49, a former top Bank of America dealmaker, joined UBS this month to run the investment bank with 45-year-old 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 departure of CEO Oswald Gruebel, 68.

Ermotti told shareholders in May the bank improved 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 set to start in September.

Libor Probes

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 consider itself “appropriately provisioned for all matters” considered in the quarter. Ermotti said the bank is not at the “center” of the Libor probes.

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