Focus on investment bank overhaul at UBS Q3 results

Mon Oct 24, 2011 7:01pm EDT

* Accounting gain also helped U.S. bank results

* Investment bank suffering amid debt crisis

* Interim CEO Ermotti working on investment bank cuts

* Net new money seen holding up despite trading scandal

By Emma Thomasson

ZURICH, Oct 25 (Reuters) - Swiss bank UBS is set to post a big fall in underlying third-quarter profit on Tuesday due to sluggish trading, though an accounting gain helped cancel out a $2.3 billion rogue trading loss uncovered last month.

UBS said earlier this month it would post a "modest" third quarter profit even after the $2.3 billion loss and 400 million Swiss francs of restructuring costs, helped by a 1.5 billion franc gain on the value of its own debt.

This accounting gain -- which occurs because the bank could profit from buying back its own bonds at lower levels -- also gave a big boost this quarter to profits at most U.S. banks.

However, UBS results are also set to mirror their U.S. peers in showing declining bond and stock revenues as sovereign debt worries spiralled in the three months to September.

Analysts polled by Reuters forecast net profit of just 276 million Swiss francs, down over 80 percent from a year ago and compared with the 1 billion francs it posted in the second quarter, already hit by falling trading volumes.

Stripping out the trading loss, accounting gain and other exceptional items, analysts forecast a clean net profit of 588 million francs.

"Client inactivity arising from the European debt crisis and its poor position in investment banking are mainly to blame for the poor Q3 result," said Helvea analyst Peter Thorne.

Third quarter revenues from fixed income, currencies and commodities (FICC) fell 49 percent on average from the second quarter across JPMorgan , Citi , Bank of America , Goldman Sachs and Morgan Stanley , after stripping out accounting gains.

In equities trading, revenues fell 24 percent on average at those five banks, excluding the own credit gains.

With the numbers unlikely to surprise, investors will be focusing on comments by interim Chief Executive Sergio Ermotti, appointed after Oswald Gruebel quit over the trading loss.

He is working on a major overhaul of UBS's troubled investment bank ahead of an investor day on Nov. 17 that is expected to make radical cuts to focus on serving the core UBS business of managing the money of wealthy clients.

"We expect to get more clarity regarding the future run rates at the investment bank and its FICC trading business, how advanced UBS is with its restructuring and if there could potentially be further restructuring announcements to come," said Vontobel analyst Teresa Nielsen in a note.

UBS already announced in August it would cut 3,500 jobs from its around 66,000 staff to shave 2 billion Swiss francs off annual costs.

Investors will also be keen for an update on the bank's internal investigation into the trading scandal as well as any progress on choosing a permanent replacement for Gruebel, which the bank has said could take up to six months.

Chief Financial Officer Tom Naratil said earlier this month the trading scandal had not resulted in lots of the bank's rich clients withdrawing their money, predicting wealth management net new money broadly similar to the second quarter, when it reported client inflows of 8.2 billion Swiss francs.

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