UBS Reports CHF11.5bn First Quarter Loss

by Carla Johnson, Investors Offshore.com

07 May 2008

Swiss bank UBS has announced an eye-watering first quarter loss attributable to shareholders of CHF11.5bn (USD10.9bn), as the fall-out from last year's US sub-prime mortgage meltdown continues to reverberate through the global banking industry.

In a pre-announcement of its first quarter results on Tuesday, UBS blamed the loss, which was in line with expectations, on "the downward spiral in US mortgages and related instruments" which accelerated during the quarter, and also spread to other structured credit positions.

This development led to first quarter 2008 losses of around USD19bn on these affected positions.

The bank revealed that the quarter was also characterized by lower capital markets activity, sharply reduced mergers and acquisitions, and falling securities prices. This coincided with a weakening of the US dollar and the British pound against the Swiss franc, UBS's reporting currency.

However, in spite of these market conditions, and with the exception of the additional losses experienced on UBS's positions affected by the US mortgage and credit market turbulence, revenue performance in most of UBS's businesses was reported as "satisfactory." UBS also claimed success in bringing controllable costs down.

For the wealth and asset management businesses and Business Banking Switzerland, profit levels remained high in absolute terms, despite a reduction in comparison with the prior quarter.

A 13% quarter-on-quarter decrease in invested assets, and therefore asset-based fee income, was primarily due to the aforementioned strengthening of the Swiss franc against the major currencies in which many invested assets are denominated (US dollar, euro, British pound) and a second successive quarter of declining equity indices. The pre-tax profit for Global Wealth Management & Business Banking was CHF2.1bn in the first quarter.

With regard to investment banking activity, revenues generated by the advisory and capital markets businesses fell considerably in comparison with first quarter 2007, in the context of a more than 40% contraction in global deal volume.

The equities business was negatively impacted by considerably weaker proprietary trading results and lower revenues from non-exchange traded derivatives, such as over the counter (OTC), and equity-linked instruments, which were only partially offset by improved contributions from cash commissions, exchange-trade derivatives and prime brokerage.

Although trading results were weak in most FICC areas, there were some exceptions such as rates, which had a strong quarter driven by the European swaps and options business, government bond trading and the foreign exchange business, which benefited from higher volumes and good client flows. In commodities, lower revenues from energy trading were offset by good results in other areas such as metals.

UBS further revealed that it has substantially reduced its risk inventory since the third quarter of 2007: positions related to US sub-prime residential mortgages have decreased by approximately 60%; and a combination of disposals and writedowns has reduced other exposures related to US residential and commercial real estate.

In the first quarter of 2008, UBS reduced its balance sheet by accelerating the reduction in trading inventories in its Investment Bank.

UBS expects the difficult financial services environment to remain, and to be characterized by a continuing unfavourable global economic climate, deleveraging by institutional and private investors, slower wealth creation, and lower trading and capital market activity.

As a result, UBS plans to reduce its workforce by up to 2,600, of which the large majority will be redundancies. In the other business groups, UBS will reduce employee numbers mainly through natural attrition and internal redeployment, although it said that it will not be possible to avoid redundancies entirely.

Assuming no change in market conditions, UBS estimates that, by mid-2009, the firm as a whole will have about 5,500 fewer employees.

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