UBS to report a modest Q3 profit

Profit despite $2.3-bn rogue trade loss; $2-bn cost-cutting plans on track.

Less than three weeks after disclosing a $2.3-billion blow to its operations on account of an unauthorised trade, Zurich-based banking group UBS on Tuesday said it expected to report a modest profit for the third quarter of 2011.

In a statement, UBS said it expected to report net new money inflows in its wealth management businesses at levels broadly similar to those of the previous quarter. Global asset management will report moderate net new money outflows.

UBS expects to report a modest net profit attributable to shareholders for the third quarter. The result includes the previously announced $2.3-billion loss resulting from the unauthorised trading incident and approximately 0.4 billion Swiss francs ($433 million) of restructuring charges associated with the bank’s cost reduction programme.

This update is based on preliminary estimates early in the third-quarter closing process. No further updates are anticipated prior to October 25, when UBS will announce its third-quarter results.

In addition, the result benefited from own credit gains on financial liabilities measured at fair value in the region of 1.5 billion Swiss francs ($1.63 billion), primarily due to the widening of UBS’s credit spreads during the quarter.

Furthermore, UBS will report a gain on the sale of treasury-related investments of approximately 0.7 billion Swiss francs ($759 million) in wealth management and Swiss Bank. At present, the group tax expense is expected to be close to zero for the quarter.

On September 15, the bank disclosed that one of its traders in London, working with the exchange traded funds division, had taken an unauthorised position that led to a $2.3-billion loss. At that time, it was widely rumoured that UBS might end up reporting a third-quarter loss.

The 31-year trader, Kweku Adoboli, has since been arrested by the City of London police. He was later charged with fraud and is now in judicial custody. Both UBS and the police are conducting independent investigation into the incident. Later in September, UBS group CEO Oswald J Grübel quit owning up moral responsibility for the loss.

In an internally circulated note to his colleagues on September 18, Grübel said, “Ultimately, the buck stops with me. I and the rest of senior management are responsible for dealing with wrongdoing.”

UBS’s capital position remains strong and its capital base at the end of the third quarter is expected to remain broadly in line with the balance at the end of the previous quarter, including the loss associated with the unauthorised trading incident. The BIS Basel-II tier-1 capital ratio is expected to decline slightly, compared with the second quarter, due to the impact on risk-weighted assets of the unauthorised trading incident. The previously announced cost reduction programme, intended to align UBS’s cost base with changes in the market environment, was on track, the bank said.

In August, UBS announced a cost-cutting plan to save $2.18 billion by the end of 2013, which would involve job losses of 3,500. Of the expected 3,500 staff reductions, approximately 45 per cent will come from the investment bank, 35 per cent from wealth management and Swiss bank, 10 per cent from global asset management, and 10 per cent from wealth management Americas.

On Tuesday, the bank said majority of the affected employees had been notified, and reductions would continue into 2012. UBS will continue to invest in growth regions, including Asia Pacific, the Americas, and emerging markets, as well as in its global wealth management franchise.