The News Is Ugly At UBS; Clients Flee; 2Q Earnings Are Worse Than Expected; Reorg Strategy
As you know, UBS reported a larger-than-expected second-quarter loss of $327 million today. Contributing to the dismal result was another $5.1 billion in U.S. mortgage related write-downs.
The news continues to be horrible, and financial advisors at UBS are getting nervous— really nervous. Says one top UBS financial advisor: “It is extraordinarily difficult to attract new business with UBS on your business card.” He also reckons that many of his current clients would be “thrilled” if he left.
Put yourself in a UBS advisor’s shoes. Let’s see: There are 80,000 illiquid auction-rate securities accounts—well, on August 8, UBS, under pressure from the SEC and the New York AG, agreed to redeem clients’ ARS. Then, also this summer, UBS became the target of a tax-evasion scheme when the FBI accused UBS of shielding American citizen’s assets in offshore accounts to avoid U.S. taxes. And all this is on top of the $42.5 billion in write-downs in bad sub-prime bets.
The Reorg
Not surprisingly, as our advisor friend notes above, UBS’ overall incompetence has had a chilling effect upon retail clients. Clients in the Wealth Management International & Switzerland business, where pre-tax income was down 17 percent, withdrew CHF9.3 billion (or, about, $8.5 billion) more than they invested in the second quarter. It wasn’t any better in the Wealth Management U.S. business, where clients withdrew roughly CHF8 billion (or about $7.5 billion) more than they invested the second quarter. Of course, some of that is a result of tax season—UBS notes that withdrawal activity was heaviest in April.
Pre-tax income in Wealth Management U.S. was negative CHF741 million in the quarter, largely the result of a CHF900 million charge associated with the auction rate securities settlements. Unfortunately, that will cover only the fines the firm will be paying out for settlements with the New York Attorney General and the SEC. In those settlements, agreed to last Friday, UBS is to pay back more than $22 billion to investors that bought illiquid auction-rate securities.
Within the earnings announcement also came news that the bank is reorganizing its key businesses into three separate groups—wealth management, investment banking and asset management—and giving each unit’s management greater autonomy to run the individual businesses. This will “align incentives for management and staff of each autonomous business division directly with its financial results … and promote profit generation within an appropriate and rigorous risk framework,” UBS said in a press release. While the move isn’t the break-up activist shareholder and ex-CEO Luqman Arnold requested back in May in a letter to the UBS board, it is one step closer. And the separation of the businesses will surely fuel further speculation of a sale of one of them down the road.
UBS has forewarned investors the environment for its businesses will not likely improve in the second half of the year either: “UBS does not expect to see any improvement in the adverse economic and financial market trends that affected this quarter’s results.” Here’s to next year.
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