(Adds analyst comment.)
By Katharina Bart
Of DOW JONES NEWSWIRES
ZURICH (Dow Jones)
UBS, among the hardest-hit banks by the financial crisis, said its swung to net loss of 564 million Swiss francs ($552.9 million), after a CHF283 million year-ago net profit. Along with an own credit losses of CHF1.44 billion, its earnings were hit by CHF409 million in charges related to selling Brazilian investment bank Banco Pactual, and CHF305 million related to a convertible note bought by the Swiss government.
Chief Executive Oswald Gruebel was cautiously optimistic about the bank's prospects next year. "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," he said. Those include how income from portfolio fees and trading develop, financial head John Cryan told journalists.
However, analysts were taken aback by the amount of damage more than $50 billion in write-downs on illiquid securities at UBS' investment bank had caused its key private banking arm, and will continue to incur.
Gruebel said that while a recent landmark settlement with U.S. tax authorities is having a "profound" impact on the bank's efforts to restore confidence and on staff morale, outflows still won't snap back. The bank cited as reasons its exit of U.S. offshore activities, as well as UBS still being unprofitable, which has led clients to be concerned about stowing their money with the bank.
"We expect the weak performance in this division (the private bank) will particularly concern the market as it has often been viewed as a cash cow that will support UBS no matter what the performance is in other divisions," said Bernstein Research analyst Dirk Hoffmann-Becking. He rates UBS at underperform with a CHF15 target price.
The wider-than-expected loss and poor private banking performance led to a sell-off in UBS shares. At 0938 GMT, the stock was CHF0.8% lower, or down 4.6%, at CHF16.55, shaving roughly $2.8 billion off UBS' market capitalization. UBS lagged a 2.7% fall in the Stoxx Europe 600 bank index.
UBS' revenue will also be hampered by low interest rates, which will hit net interest income, the bank said. The bank also expects another, potentially "sizable" own credit charge in the fourth quarter, as a result of further tightening of its credit spreads.
The credit charges relate to accounting rules used by most lenders, under the terms of which banks can book non-cash gains when the value of their debt falls, as it theoretically needs less money to buy back its own debt. When markets recover, these gains are reversed into losses.
Operating income rose 4% on the year to CHF5.77 billion from CHF5.54 billion, mainly because year-ago trading losses turned into modest gains. This was driven by an improvement at the bank's fixed-income business, which for the first time in nine quarters made a positive contribution.
"We are definitely on the road to recovery (at the investment bank), but it will be a wobbly road," Cryan said, when asked about the unit's outlook after hiring notable traders such as Rajeev Misra, formerly with Deutsche Bank AG (DB).
Operating expenses increased, driven by higher personnel expenses, which partly reflect a change in compensation policy, under which a higher proportion of bonuses will be paid in cash and therefore needs to be booked in the ongoing business years.
UBS continued to lose client assets during the quarter, with withdrawals at the largest unit - wealth management and Swiss bank - actually increasing from the prior three months. Net new money outflows totaled CHF36.7 billion. The private bank, U.S. brokerage, and asset management unit all lost client funds for the quarter.
Though the bank is widely seen by investors and regulators in Switzerland as far more stable than several months ago, UBS still presents a sharp contrast to crosstown rival Credit Suisse Group (CS) or major European competitors such as Deutsche Bank and Barclays PLC (BCS).
Credit Suisse pleased investors with prospects for a year-end dividend on a far better-than-expected profit for the quarter, while Deutsche's profit tripled on tax gains and trading. Barclays plans a trading statement Nov. 10.
The poor third quarter puts the onus on UBS, which will not pay a dividend until it returns to profitability, to deliver specifics on how it plans to fix its private bank when it provides investors with a strategy update later this month.
"The pressure is now mounting for investor day Nov. 17 to illustrate the turnaround of the group and specifically private banking flows," JP Morgan analyst Kian Abouhossein said. He rates the stock at neutral with a CHF20 target price.
Specific measures include lifting prices on products and services for wealthy clients, who have enjoyed discounts as UBS battles the financial crisis, Cryan said. He said private banking executives will disclose details at the investor event.
-By Katharina Bart, Dow Jones Newswires; +41 43 443 8043; katharina.bart@dowjones.com
(Anita Greil in Zurich contributed to this item.)