UBS AG (UBS) reported a loss in the third quarter. In addition to this, the company announced a massive job cut over the next few years. The company has detailed a major overhaul of its business, particularly its Investment Bank division, and aims to trim down over 15% of its workforce to achieve headcount of approximately 54,000 by 2015.
UBS AG reported third quarter net loss attributable to shareholders of CHF 2.2 billion ($2.3 billion) or CHF 0.58 per share, which substantially lagged the prior quarter’s profit of CHF 425 million or CHF 0.11 per share and year-ago quarter’s earnings of CHF 1.0 billion or CHF 0.27 per share. The quarterly results were primarily affected by impairment losses as well as an own credit loss.
However, after adjusting for impairment losses, the own credit loss, and restructuring provision releases, UBS AG’s pre-tax profit came in at CHF 1.4 billion in the reported quarter. The company experienced higher net interest and trading revenues excluding own credit, as well as net fee and commission income and other income. However, the positives were partly offset by increased operating expenses.
Notably, as a result of UBS AG’s strategy to exit or right-size certain businesses within its Investment Bank division, impairment losses of CHF 3.1 billion associated with goodwill and other non-financial assets related to the Investment Bank were recognized in the quarter. Moreover, the company experienced own credit loss of CHF 863 million as against a gain of CHF 239 million in the prior quarter and restructuring provision releases of CHF 22 million in the reported quarter..
UBS AG’s operating income fell 2% from the prior quarter to CHF 6.3 billion while operating expenses soared 61% sequentially to CHF 8.8 billion. On a sequential basis, operating profit before tax escalated 20% at its Wealth Management division and 10% at Wealth Management Americas. Moreover, operating profit at Global Asset Management and Retail & Corporate moved up 5% and 3%, respectively.
However, at its Investment Bank unit, the company experienced a pre-tax loss of around $2.9 billion in the quarter, mainly reflecting impairment losses. This compared with a loss of only $130 million in the prior quarter.
UBS AG's invested assets were CHF 2,242 billion as of September 30, 2012, up from CHF 2,163 billion as of June 30, 2012.
UBS AG saw an increase in regulatory capital. Its Basel 2.5 tier 1 capital ratio continued to improve and stood at 20.2% on September 30, 2012, up 100 basis points sequentially. Moreover, Basel 2.5 tier 1 capital hiked by CHF 1.2 billion, as the company’s quarterly loss was mitigated by the positive impact from a lower capital deduction due to the impairment of goodwill in its Investment Bank and a reversal of own credit losses for capital purposes. As of September 30, 2012, balance sheet assets stood at CHF 1,369 billion, dropping CHF 43 billion from June 30, 2012.
Outlook and Restructuring Initiatives
According to UBS AG, progress on continued and material improvements to the ongoing Eurozone sovereign debt concerns, the European banking system and the U.S. federal budget deficit issues, as well as the uncertainty at large could impact the client activity levels in the fourth quarter. Yet, it expects wealth management businesses to continue attracting net new money.
UBS AG has also announced a number of measures to boost its strategic development and help improve its profitability and sustainability. This includes a significant restructuring of its Investment Bank and significant layoffs. The efforts are aimed at reducing its risk weighted assets and refocus on its wealth management business.
As a result, UBS AG expects to incur restructuring charges of around CHF 500 million in the fourth quarter which would result in a net loss in the quarter.
The company contemplates elimination of the fixed income business of the Investment Bank and focus on its traditional strengths in advisory, research, equities, foreign exchange and precious metals. It will include two core client segments – Corporate Client Solutions and Investor Client Solutions.
Considering the initiatives, UBS AG also disclosed that it is expecting its Basel III risk-weighted assets to reduce further to below CHF 200 billion by end 2017. Further, Investment Bank would operate with Basel III risk-weighted assets of less than CHF 70 billion effective January 1, 2013.
Finally, UBS AG expects the measures to help in achieving total cost savings of CHF 5.4 billion. This includes incremental cost savings of CHF 3.4 billion above the CHF 2 billion cost savings program announced in August 2011. The implementation of the changes would occur over the next three years and the company expects restructuring charges of CHF 3.3 billion over this period.
Further, Andrea Orcel will lead the Investment Bank with immediate effect, whereas Carsten Kengeter will step down from Group Executive Board and head management of exited Investment Bank businesses.
Moreover, it plans to provide progressive capital returns to its shareholders till the accomplishment of its future capital plans. Following this, the company remains confident of sustaining and growing its businesses while maintaining a total payout ratio of 50% or more.
Our Take
Given the stressed operating environment, we believe any significant improvement in the earnings of UBS AG would remain elusive in the upcoming quarters. However, prudent business model changes can lead to improvement in efficiency and bolster its competitive edge.
Amidst the overall economic volatility and the Eurozone debt crisis, the company will focus on building its capital level. Restructuring initiatives are also encouraging and we believe that such efforts would help improve the company’s operating efficiency in the future.
As a matter of fact, in the recent months, Deutsche Bank AG (DB) also announced the plans of revamping its business, which involves change in compensation practices, job cuts and asset sales. Moreover, Royal Bank of Scotland Group Plc. (RBS) and Credit Suisse Group AG (CS) have decided to slash workforce to address such aforementioned issues. A number of U.S. banks such as Citigroup Inc. (C) and Bank of America Corp. (BAC) also chose business restructuring post the financial crisis.
UBS AG currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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