UBS warns of poor Q1 as investment bank struggles

ZURICH Tue Feb 7, 2012 1:02pm EST

Swiss bank UBS CEO Sergio Ermotti and CFO Tom Naratil (L) address the annual news conference in Zurich February 7, 2012.  REUTERS/Arnd Wiegmann

Swiss bank UBS CEO Sergio Ermotti and CFO Tom Naratil (L) address the annual news conference in Zurich February 7, 2012.

Credit: Reuters/Arnd Wiegmann

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ZURICH (Reuters) - Swiss bank UBS predicted further weakness in investment banking after a restructuring of the business failed to prevent an earnings hit from the euro zone debt crisis and worries about the global economy.

"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," UBS said on Tuesday.

The bank said fourth-quarter net profit shrank to 393 million Swiss francs ($425.95 million) from 1.66 billion francs in the 2010 period and compared with a forecast for 737 million in a Reuters poll.

Investment banks had a torrid time last year as trading and advisory income was hammered as clients pulled back from markets due to the euro zone debt crisis, and stopped doing deals. The outlook is set to remain dour as tougher regulations and economic slowdown bite.

U.S. rivals including Goldman Sachs and JPMorgan posted weak fourth quarter income, and Deutsche Bank also fell to a fourth quarter loss due to a slump in bond trading.

UBS, which announced in November it would scale back its investment bank business to focus on its flagship private bank, said it had cut risky assets by 20 billion Swiss francs in the fourth quarter with "no significant impact on profitability."

Kepler Capital Markets analyst Dirk Becker welcomed the reduction in risky assets but said there were still questions over the future of the investment bank.

"Revenues have recovered from the really poor third quarter levels, but are still too low to feed a division with still over 17,000 employees," he said.

"The downsizing plans of the management will reduce this revenue base further and make it impossible to achieve satisfactory returns for this division, which will still consume the largest part of the capital."

Shares in UBS fell 2.8 percent in afternoon trade.

UBS said it saw a few "bright spots" in the performance of its investment bank, including foreign currency trading, short- and long-term rates and cash equities in Asia-Pacific. The unit, hit by a $2 billion rogue trader scandal uncovered in September, pared its pretax loss to 256 million from a loss of 650 million the previous quarter.

UBS said it was making progress on delivering on plans to cut total headcount by almost 4,000, with total staff down 1,101 in the quarter to 64,820 at the end of 2011, but said it would have to slash more costs if market conditions worsen.

WEAKER PRIVATE BANK

Meanwhile, the private bank failed to show it can pick up the slack from UBS's fading investment bank ambitions. Pretax profit and revenue both shriveled, in large part because clients shunned trading and investments amid market turmoil and uncertainty over Europe's debt and the U.S. budget deficit.

UBS, which missed its own private banking margin target by far, appears to be sacrificing short-term profits in favor of a payout later and restoring its credibility as a trusted advisor to the wealthy.

UBS's reputation has been battered by a series of scandals, beginning with an in-house hedge fund which gorged on U.S. mortgage securities and a messy U.S. probe into offshore accounts, and most recently, an alleged rogue trader.

Now, the bank is advising many clients to be cautious in view of the euro zone troubles, arguably at the expense of revenue from fees and commissions, which live from client activity.

"I certainly don't think the third and fourth quarter are the new normal. It could be around for another quarter or so, but I don't believe that is the environment of the future," UBS's financial head Tom Naratil said.

Inflows at the UBS flagship private banking arm slipped to 3.1 billion Swiss francs in the fourth quarter from 3.8 billion in the previous quarter, while the gross margin on invested assets fell 6 basis points to 91 basis points.

UBS stressed its eurozone exposure was relatively low, in comparison to Deutsche Bank which recently posted a fourth-quarter loss amid one-off charges such as Greek debt writedowns into the quarter.

The trading scandal surrounding former UBS trader Kweku Adoboli will linger as he is set to stand trial in September after pleading not guilty to trades the Swiss bank says were unauthorized.

UBS said investment banking head Carsten Kengeter would voluntarily forgo a bonus for 2011 after the scandal, while total bonuses for the bank will fall 40 percent and 60 percent in the investment bank.

The bank is amortizing roughly 300 million francs this year for bonuses, in a bid to appease select managing directors at UBS's investment bank in areas including deal advisors, forex trading and leveraged loans buyouts.

UBS said it had been granted some immunity by Switzerland's antitrust authority in return for cooperating with its probe into the potential manipulation of LIBOR. [ID:nL5E8D71M6]

Several countries are investigating "improper attempts" to manipulate LIBOR rates, which is the benchmark price big banks set for interbank borrowing costs. WEKO said last week it was investigating 12 banks, including UBS. [ID:nL5E8D30I7] ($1 = 0.9227 Swiss francs)

(Writing by Emma Thomasson; Editing by Sophie Walker and Jon Loades-Carter)

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