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UBS reports a third quarter loss of CHF 564 million, impacted by accounting charges of CHF 2,150 million
Excluding these accounting charges, the underlying pre-tax profit was CHF 1,557 million
Commenting on UBS's third quarter results, Group CEO Oswald J. Grübel said: "In the last two quarters, we have been addressing the bank's most critical problems. Business is steadily returning to normal: We see this in a clear improvement in our financial performance. Management actions are delivering visible results, and we are continuing to emphasize risk reduction and capital strength. Moreover, the settlement of the litigation with US tax authorities and the decision of the Swiss government to exit its investment in UBS are having a profound impact on our efforts to rebuild confidence in our company and on staff morale. Having stabilized the bank's financial condition and resized the business, I expect to see further progress in future quarters, particularly in 2010. However, this progress will depend on market and other factors."
Third quarter accounting charges of CHF 2,150 million
UBS reports a third quarter net loss attributable to UBS shareholders of CHF 564 million (CHF 1,402 million in second quarter), due to three substantial accounting charges.
In third quarter 2009, UBS incurred an own credit charge of CHF 1,436 million for financial liabilities designated at fair value (CHF 1,213 million in second quarter), largely reflecting the tightening of UBS's credit spreads in line with a significant improvement in the market's perception of the bank's creditworthiness. This charge does not impact the Group's regulatory capital.
In relation to the closing of the UBS Pactual sale, UBS recorded a net loss of CHF 409 million. This charge reflected foreign currency translation impacts on the carrying value of UBS Pactual and the impact of the translation of the US dollar-denominated sale consideration into Swiss francs. As a result of the sale of UBS Pactual, UBS's tier 1 capital increased by CHF 0.7 billion and risk-weighted assets decreased by CHF 2.0 billion.
The conversion of the mandatory convertible notes (MCNs) issued to the Swiss Confederation resulted in a loss of CHF 305 million.
Underlying profitability improved
Excluding the above mentioned charges, underlying pre-tax profitability increased to CHF 1,557 million. This was mainly due to better results in the Investment Bank's fixed income, currencies and commodities (FICC) business. The other business divisions contributed positively to the quarter's results, although a decline in pre-tax profits from Wealth Management & Swiss Bank partly offset the improvement seen in the Investment Bank, Wealth Management Americas and Global Asset Management.
Total operating income decreased slightly to CHF 5,766 million from CHF 5,770 million. Operating income in third quarter 2009 included the effect of the accounting charges explained above. Net income from trading businesses was positively affected by the improvement in the Investment Bank's FICC business. Net fee and commission income was up slightly as higher portfolio management and advisory fees offset small decreases in other categories. UBS recorded lower credit loss expenses of CHF 226 million in third quarter 2009, compared with CHF 388 million in second quarter 2009.
Total operating expenses decreased 10% to CHF 6,359 million from CHF 7,093 million. Excluding the goodwill impairment charge of CHF 492 million in the second quarter related to the sale of UBS Pactual and restructuring charges in the second and third quarter, operating expenses would have been up 6%. This was driven by an increase in personnel expenses, partly reflecting a change in compensation policy, under which a higher proportion of variable compensation is to be paid in cash (and therefore expensed in the performance year 2009) than in share-based awards (which are amortized over the vesting period of the awards). All business divisions were affected by this change, but Wealth Management & Swiss Bank was the most heavily affected.
UBS expects to see further progress in future quarters, particularly in 2010. However this progress will depend on market and other factors. UBS anticipates the early part of 2010 to reflect the full impact of 2009's cost reductions. The bank does not expect an immediate recovery in client net new money flows, and the impact of low interest rates on net interest income continues to hold back revenues, especially in Wealth Management & Swiss Bank. UBS expects the Investment Bank's performance to continue to improve into 2010, but fourth quarter results will likely reflect the early stage of its recovery. In addition, based on current conditions, UBS expects another own credit charge in the fourth quarter, as a result of further tightening of its credit spreads.
Business division performance: 3Q09 vs 2Q09
Wealth Management & Swiss Bank results were disappointing as it recorded a pre-tax profit of CHF 792 million, compared with CHF 932 million. The decline occurred despite a decrease in restructuring charges as several items affected third quarter results, including the abovementioned change in compensation policy.
Wealth Management Americas returned to profitability as it recorded a pre-tax profit of CHF 110 million compared with a pre-tax loss of CHF 221 million, mainly due to lower operating expenses.
Global Asset Management experienced stronger performance and pre-tax profit rose to CHF 130 million from CHF 82 million. The increase was primarily due to higher performance fees, mainly in alternative and quantitative investments, and higher management fees.
The Investment Bank recorded a pre-tax loss of CHF 1,370 million compared with a pre-tax loss of CHF 1,846 million, reflecting the loss on own credit explained earlier. The FICC business, which saw its first quarter of net positive revenues in nine quarters, showed the progress in risk reduction and the effect of key hires in its credit business. Equities and investment banking recorded lower revenues.
The Corporate Center recorded a pre-tax loss from continuing operations of CHF 255 million in third quarter 2009. The loss on the closing of the UBS Pactual sale, attributed to Corporate Center, was partly offset by a CHF 156 million foreign exchange gain recognized in third quarter 2009 following UBS's decision to replace US dollar financing relating to two of its US entities with Swiss franc financing. The MCNs issued in December 2008 and converted in August 2009 contributed a net loss of CHF 305 million, while the revaluation of UBS's option to acquire the SNB StabFund's equity contributed gains of CHF 168 million.
Net new money and invested assets
Wealth Management & Swiss Bank - Outflows of net new money were stable in the third quarter at CHF 16.7 billion compared with CHF 16.5 billion in second quarter. Total net new money outflows from Swiss clients increased to CHF 3.9 billion from CHF 0.2 billion. Net new money outflows for international clients slowed to CHF 12.9 billion from CHF 16.3 billion.
Wealth Management Americas - The third quarter saw net new money outflows of CHF 9.9 billion, compared with net new money outflows of CHF 5.8 billion in second quarter 2009.
Global Asset Management - Net new money outflows were CHF 10.0 billion compared with CHF 17.1 billion. Institutional net new money outflows slowed to CHF 1.2 billion from CHF 6.6 billion and wholesale intermediary net new money outflows slowed to CHF 8.8 billion from CHF 10.6 billion. The business saw its first net new money inflows from third-party clients since fourth quarter 2006 following good investment performance.
Invested assets stood at CHF 2,258 billion on 30 September 2009, compared with CHF 2,250 billion on 30 June 2009. CHF 982 billion of these assets were attributable to Wealth Management & Swiss Bank, CHF 694 billion were attributable to Wealth Management Americas and CHF 583 billion were attributable to Global Asset Management.
Capital base and balance sheet
On 30 September 2009, UBS's BIS tier 1 ratio stood at 15.0%, up from 13.2% on 30 June 2009. During the third quarter, risk-weighted assets (RWA) decreased 15% to CHF 210.8 billion, and BIS tier 1 capital decreased by CHF 1.0 billion to CHF 31.6 billion. These numbers include the CHF 1.4 billion impact on equity in the third quarter of the MCNs coupon consideration paid by UBS in connection with the conversion of the MCN converted in August 2009, as well as the effect of the closing of the UBS Pactual sale in the third quarter.
UBS reduced its balance sheet by a further CHF 124 billion during the third quarter and held total assets of CHF 1,476 billion on 30 September 2009.