) 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.
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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%,
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,
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
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
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
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
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.
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
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
) also announced the plans of revamping its business, which
involves change in compensation practices, job cuts and asset
Royal Bank of Scotland Group Plc.
Credit Suisse Group AG
) have decided to slash workforce to address such aforementioned
issues. A number of U.S. banks such as
Bank of America Corp.
) also chose business restructuring post the financial crisis.
UBS AG currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.