The Never Ending Story Of UBS AG Losses

UBS AG (UBS) reported fourth quarter net loss attributable to shareholders of CHF 1.9 billion ($2.0 billion) or CHF 0.50 per share, which substantially lagged the prior-year quarter’s profit of CHF 323 million ($354 million) or CHF 0.08 per share and compared favorably with prior quarter’s loss of CHF 2.1 billion ($2.2 billion) or CHF 0.57 per share. The quarterly results were primarily affected by net charges for provisions for litigation and regulatory matters as well as net restructuring charges and own credit loss.

However, after adjusting for own credit loss along with restructuring and regulatory charges, UBS AG’s adjusted pre-tax loss came in at CHF 1.2 billion ($1.3 billion) in the reported quarter. The company experienced lower net interest and trading revenues excluding own credit, while net fee and commission income and other income increased. Further, decreased operating expenses acted as a tailwind for the quarter.

Notably, the company experienced own credit loss on financial liabilities of CHF 414 million ($445 million) as against CHF 863 million ($897 million) in the prior quarter and restructuring charges of CHF 258 million ($277 million) in the reported quarter. Moreover, net charges for provisions for litigation, regulatory and similar matters were CHF 2.1 billion ($2.3 billion).

For full year 2012, net loss attributable to shareholders was CHF 2.5 billion ($2.7 billion) or CHF 0.67 per share, which substantially lagged the prior-year’s profit of CHF 4.1 billion ($4.6 billion) or CHF 1.08 per share.

UBS AG’s operating income fell 1.6% from the prior quarter to CHF 6.2 billion ($6.7 billion) while operating expenses dipped 9.1% sequentially to CHF 8.0 billion ($8.6 billion). On a sequential basis, operating profit before tax decreased 32% at its Wealth Management division and 9% at Wealth Management Americas. Moreover, operating profit at Retail & Corporate moved down 9%, while it escalated 18% for Global Asset Management.

However, at its Investment Bank unit, the company experienced a pre-tax loss of around CHF 557 million ($598 million) in the quarter. This compared with a loss of CHF 2.9 billion ($3.0 billion) in the prior quarter.

UBS AG’s invested assets were CHF 2,230 billion ($2,440 billion) as of Dec 31, 2012, down from CHF 2,242 billion ($2,385 billion) as of Sep 30, 2012.

UBS AG saw an increase in regulatory capital. Its Basel 2.5 tier 1 capital ratio continued to improve and stood at 21.3% on Dec 31, 2012, up 110 basis points sequentially. Basel 2.5 tier 1 capital declined by CHF 1.4 billion ($1.5 billion) sequentially, due to the company’s quarterly loss and negative foreign currency effects. As of Dec 31, 2012, balance sheet assets stood at CHF 1,259 billion ($1,378 billion), dropping CHF 107 billion ($114.9 billion) from Sep 30, 2012.

Outlook

According to UBS AG, failure to attain persistent progress on material improvements in 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 first quarter of 2013. Yet, it expects wealth management businesses to continue to attract net new money.

In Conclusion

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 taken during 2012 are encouraging and we believe that such efforts would help improve the company’s operating efficiency in the future.

UBS AG currently carries a Rank #2 (Buy). Among other foreign banks, Bank of Montreal (BMO), Westpac Banking Corporation (WBK) and Credit Suisse Group (CS) also carry a Rank #2 (Buy).

 

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