The largest Swiss bank, UBS (NYSE:UBS), is expected to release last quarter’s earnings next Tuesday. Given that half of the bank itself expects a loss for the quarter in the range of CHF 2 to 2.5 billion ($2.2 to 2.7 billion), what we are really interested in seeing is how well its operations have responded to the drastic cost-cutting measures it announced along with its Q3 2012 earnings release (see Poor Performance Forces UBS To Announce Drastic Job Cuts).
The heavy losses for the quarter are justified given the combined effect of CHF 1.4 billion ($1.5 billion) in charges to settle LIBOR manipulation charges (see UBS Settles Libor Manipulation Charges At A Whopping $1.5 Billion), CHF 700 million ($770 million) in charges to settle claims related to mortgage-backed securities, restructuring charges of CHF 500 million ($550 million) and a CHF 400 million ($440 million) accounting charge from revaluation of its own debt. Looking beyond these one-time charges, we will be looking at the overall performance of UBS’s wealth management business besides the impact on its trading revenues from the decision to substantially trim fixed-income trading operations as we attempt to answer the questions that follow.
Has The Wealth Management Business Turned A Corner?
As is evident from the chart above, the wealth management business contributes to well over a third of UBS’s total value. This is why we have repeatedly pointed out how the bank’s biggest priority should be to strengthen the performance of this business given the weak numbers over the recent quarters despite a significant improvement in overall economic conditions globally. To put things in perspective, the bank’s wealth management operations in all locations excluding the Americas generated roughly around CHF 7.5 billion each year from 2009 to 2011 with almost negligible growth year-on-year.
More importantly, operating margins of under 35% were considerably lower than the 45% margins the bank boasted before the global economic downturn of 2008. In the upcoming earnings release, we would like to see the trend improve.
Is The Equities Business Doing Well Enough To Make Up For Lost Fixed-Income Revenues?
UBS had a sound reason for slashing its fixed-income division – Swiss capital requirement norms are one of the strictest around the world and the bank’s capital-intensive fixed-income business was a stumbling block towards achieving regulatory capital ratios. But the move comes with a major downside considering that the fixed-income business is also a major source of revenue.
With the business being reduced to a fraction of its former size, the equities business will need to step up and fill the void that is bound to be created. And with a poor track record of the equities trading desk recently – including the unauthorized trading incident which cost the bank $2.3 billion – the unit sure has a long way to go.