October 4, 2011 / 5:34 AM / 7 years ago

UBS third-quarter credit gains to cancel out trading loss

ZURICH (Reuters) - Swiss bank UBS AG UBSN.VX (UBS.N) said it expects to report a modest third-quarter net profit, easing concerns about the impact of the $2.3 billion rogue trading loss uncovered last month as the bank chalks up gains on credit derivatives.

Switzerland's national flag is seen beside the logo of Swiss bank UBS in front of a branch office in the town of Riehen near Basel September 30, 2011. Swiss bank UBS is looking at up to 10 years' hard graft to rebuild its reputation after its rogue trading loss, and needs to spend heavily on marketing and sponsorship to court clients. Crisis management and marketing executives say the Swiss bank was wise to accept the resignation of chief executive Oswald Gruebel and now needs to show how it will reform the rest of the bank to prevent a similar event in future. REUTERS/Arnd Wiegmann

The bank also expects net new money in its core wealth management business to be broadly similar to the second quarter, when it reported client inflows of 5.6 billion Swiss francs ($6.1 billion), it said on Tuesday.

Chief Financial Officer Tom Naratil said at a conference in London the trading scandal had not resulted in lots of clients withdrawing their money.

“We saw no material change in net new money flows as a result of the trading incident,” Naratil said, adding he saw further upside to the bank’s overall performance.

When UBS told investors about the rogue trades on September 15, only two weeks before the end of the third quarter, the bank said it might push it to a third-quarter loss.

“This is positive, as we expected a loss so far,” Sabine Bohn, analyst at DZ bank, said in a note.

“But (we) are cautious regarding the future trend, as the trading loss and the resignation of CEO Gruebel resulted in a massive loss of confidence.”

Interim Chief Executive Sergio Ermotti, who was appointed after Oswald Gruebel quit over the trading loss, is working on a major overhaul of UBS’s troubled investment bank ahead of an investor day on November 17.

CFO Naratil gave a taste of what that restructuring could mean at the conference in London.

“We will leverage our unique competitive advantages in wealth management while strengthening the alignment with a less complex and more focused investment bank,” he said in a webcast of the presentation on Tuesday.

“We are proud of our unique franchise which has taken decades to build and is almost impossible to replicate.”

He said UBS wanted to optimize the risk-adjusted returns of the investment bank to maximize shareholder value.

UBS shares were down 0.8 percent at 10.01 francs at 1232 GMT, outperforming a 4.4 percent drop on the European banking index .SX7P which was hit by escalating worries a Greek default will spark a banking crisis in Europe.

“The trading scandal was only uncovered toward the end of the quarter, so we need to see how Q4 goes in terms of net new money to fully assess the damage,” said Dirk Becker, analyst at Kepler Capital Markets.

“We believe it is too early to become positive for UBS, given that the downsizing of the investment bank will almost certainly cause frictions and unforeseen problems.”

ON TRACK

UBS said its third-quarter result would be hit by the $2.3 billion allegedly lost by London-based trader Kweku Adoboli and some 0.4 billion francs of restructuring costs already flagged in August when it said it would cut 3,500 jobs.

“The previously announced cost-reduction program, which is intended to align UBS’s cost base with changes in the market environment, is on track,” the bank said, adding the reductions would continue into 2012.

“UBS will continue to invest in growth regions, including Asia Pacific, the Americas and the emerging markets, as well as in our global wealth-management franchise.”

UBS said the third-quarter result was helped by a 1.5 billion franc gain due to the widening of the bank’s credit swaps in the third quarter. It will also book a 0.7 billion franc gain on the sale of treasury-related investments in Wealth Management in Switzerland.

Helvea analyst Peter Thorne said the exceptional gains suggested that the quarter’s real performance had missed his expectations.

“Actual underlying profits for the quarter were worse than expected, probably due to the investment bank,” he said.

UBS added its Tier 1 capital ratio was expected to decline slightly from the strong 18.1 percent it reported at the end of the second quarter due to the trading scandal.

The bank said it planned no further updates ahead of third-quarter results on October 25.

($1 = 0.916 Swiss Francs)

    Writing by Emma Thomasson; Additional reporting by Ruppert Pretterklieber; Editing by Erica Billingham, David Holmes and Sophie Walker

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