Following a string of scandals, a Swiss regulator has ordered the country's biggest bank, UBS, to significantly increase the cash it has available to deal with legal and compliance issues. FINMA, the Swiss financial market regulator, had ordered the banking behemoth to temporarily increase by 50 percent the capital it sets aside to deal with operational risks, including unexpected legal cases.
The bank, which is in the midst of a massive restructuring after turmoil during the financial crisis, said the order had come after FINMA examined its "recent loss history with the capital underpinning for operational risks." As a result, UBS said that from the fourth quarter it would increase its so-called Risk Weighted Assets by 28 billion francs ($31.2 billion, 22.7 billion euros), and would thereby need to significantly hike the amount of cash it has on hand.
It warned that the move could postpone a key earnings target. The Zurich-based bank had previously said it aimed to reach a 15-percent return on equity by 2015, but said Tuesday this could now be delayed "by at least one year." Following the announcement, the price of UBS shares plunged 7.7 percent to close at 17.70 francs. The Swiss stock exchange's main index was down 0.65 percent. When contacted by AFP, FINMA would not say whether the new requirement was linked to a probe it opened earlier this month into suspicions UBS had violated financial reporting rules.
UBS is in the process of turning the page on its recent dark period, and announced a massive restructuring a year ago, including 10,000 job cuts and a shift of focus to wealth management and a scaling down of its scandal-plagued investment bank. The investment bank burdened UBS with catastrophic losses during the 2008 subprime crisis and more recently dragged the bank's name through the mud and was slapped with a 1.4-billion-franc fine when it came to light that its traders had rigged the Libor Interbank lending rate that determines numerous financial and interest rate contracts around the world.
In July, US regulators also fined the bank $885 million over the subprime debacle. FINMA's decision to raise the bar for UBS overshadowed what was meant to be the bank's main announcement Tuesday: its return to a third-quarter profit. The bank posted a net profit of 577 million Swiss francs (467 million euros, $644 million), up from a 2.1-billion-franc loss a year earlier. Despite the huge year-on-year improvement, the result marked a slow-down from the second quarter and missed analyst expectations.
UBS's operating income, which slipped slightly to 6.2 billion Swiss francs, also disappointed. Analysts polled by financial newswire AWP had expected the bank to report a net profit of 600 million francs and an operating profit of 6.6 billion francs. "The operating environment in the third quarter remained challenging," the bank acknowledged.
The Zurich-based bank's activities of managing private wealth turned in a pre-tax operating profit of 555 million Swiss francs, slightly down from the 557 million it made in the second quarter of the year. UBS also saw the influx of fresh cash, which has soared in recent quarters, drop to just 5.0 billion francs in the third quarter, from 10.1 billion in the previous three-month period.
Wealth management activities in the Americas, presented separately, also posted a pre-tax operating profit of 202 million Swiss francs, down 13 percent from the previous quarter. UBS's investment bank meanwhile turned its 2.8-billion-franc loss in the third quarter of 2012 in to a 251-million-franc pre-tax profit. "Our results this quarter provide more evidence that our business model works in a variety of market conditions," company chief executive Sergio Ermotti said. Analysts too hailed the UBS's progress in implementing its new strategy. "Despite today's mediocre results, our investment case does not change," Vontobel said in a note, confirming its "buy" rating for the bank.