UBS Profit May Trail U.S. Peers on Litigation Reserves, Trading

  • European banks still weighed down by misconduct charges
  • Last year played against UBS’s ‘idiosyncrasies,’ Orcel said

UBS Group AG may this week report earnings that trailed U.S. peers as litigation charges continue to weigh on Europe’s lenders and their retreat from debt trading limits the boost from higher interest rates.

Switzerland’s largest bank will probably report a 21 percent increase in pretax profit in the fourth quarter to 282 million francs ($282 million), according to George Karamanos, a London-based analyst at Keefe, Bruyette & Woods. That compares with a 64 percent average gain reported this month by five Wall Street peers including Goldman Sachs Group Inc., which saw pretax profit spike 217 percent. UBS’s own survey of 22 analysts is for an even lower increase of 6.4 percent.

The Zurich-based lender is the first of Europe’s big global banks to report fourth-quarter earnings. Many of them, like Credit Suisse Group AG and Deutsche Bank AG, have been forced to cut costs and reduce capital-intensive debt trading as negative interest rates erode revenue and misconduct charges weigh on their finances. Sergio Ermotti, UBS’s chief executive officer, retreated from large parts of investment banking in late 2012, seeking a more stable, less risky source of income in wealth management.

Below are three key figures analysts will be looking at when UBS reports earnings on Friday.

Past Misdeeds

Analysts surveyed by UBS expect the bank to set aside 544 million francs this quarter for expenses tied to a U.S. investigation into its sales of mortgage securities before the financial crisis. Credit Suisse and Deutsche Bank last month agreed to a combined $12.5 billion in settlements to end similar investigations.

UBS is one of a handful of European lenders that have yet to settle official probes of their U.S. mortgage business. The Swiss bank increased provisions for litigation by 419 million francs in the third quarter, to 3 billion francs, almost a half of which was reserved for matters related to mortgages sold in the U.S. before the crisis.


UBS got rid of much of its fixed income trading operation in a 2012 overhaul. In 2015, it derived the largest part of its investment banking revenue from trading equities. While revenue from trading fixed income may grow in the fourth quarter, its focus on equities and exposure to Asia and Europe may result in lower growth rates than at U.S. peers, Andreas Venditti, an analyst at Vontobel in Zurich, said in a note.

Andrea Orcel, who leads its investment bank, said in an interview this month at the World Economic Forum in Davos that last year played against UBS’s “idiosyncrasies” and he doesn’t “think that’s going to change.” Revenue at the bank has trailed rivals because of the resurgence of fixed income, he said.

For more on how U.S. banks are widening their dominance in trading, click here.

While wealth management is a more stable business than investment banking, low interest rates, global political uncertainty and the lingering shock of the financial crisis have made clients reluctant to trade, hurting margins in UBS’s core business.

Margins Shrink

“There’s structural decline in the margins and this is driven by industry pressure but also by the dynamics” in UBS’s asset mix, said Tomasz Grzelak, an analyst at Baader Helvea who has a buy rating the stock.

Much of the net new money at UBS came from the very wealthy, where margins are lower, Grzelak said. On top of that the industry is facing pressure from a shift toward passive, low-cost investments.

“You clearly need to see some improvement of client activity,” said Peter Casanova, a Zurich-based analyst at Kepler Cheuvreux. “You need to see that clients get out of cash.”