Fee income at UBS under pressure

Investors are reassured as first-quarter losses at the Swiss bank are in line with April indications, but falling fee levels suggest revenues will remain under pressure.

The news that UBS would make a first-quarter loss of SFr2 billion ($1.76 billion) had already been flagged by the Swiss bank at its annual general meeting on April 15, as had the fact that the loss arose largely from trading losses in the investment bank. On the same date, UBS also re-affirmed its commitment to investment banking, silencing -- at least temporarily -- many who had been vocal that a spinoff of the investment banking division was the best way to restore confidence in the beleaguered bank.

Detailed results released yesterday contained no negative surprises, but did confirm what many specialists have been suggesting -- that the heyday for fee-based revenues is over, at least for the foreseeable future.

The loss translates to SFr0.57 on a per share basis, an improvement on both the first quarter of 2008 when the bank registered a loss of SFr5.27 per share and the previous quarter, the fourth quarter of 2008, when the loss per share stood at SFr3.02. The bank is still delivering shareholders a negative return on equity of 25% but this is contained from a negative 169% in the same quarter of 2008, suggesting the decision by the Swiss bank to aggressively write-down its portfolio last year may have been the right one. Indeed, the bank highlighted that the loss was from businesses it has either already exited or is in the process of exiting.

"An integrated business model remains fundamentally attractive to UBS," the bank emphasised with regard to its decision to continue in investment banking. However, despite an improved performance in equities, rates and emerging markets within fixed income, currencies and commodities, credit valuation adjustments against credit default protection was SFr1.9 billion, while credit loss expenses of SFr1 billion drove investment banking into a loss of SFr3.1 billion. And the Swiss bank did not have the investment banking revenues of Swiss rival Credit Suisse or the fixed income trading profits of US competitors Goldman Sachs and J.P. Morgan to bolster the situation.

UBS highlighted that cost reduction remains a priority and that at the projected headcount of 67,500 in 2010 the bank will employ 10,000 fewer people than at year-end 2008. UBS expects the positive effect of cost-cutting measures to start becoming visible in the second half of 2009. It will also withdraw from certain locations.

The Swiss bank noted that its decision to streamline businesses "reflects near-term pressure on revenues as well as expected permanent changes to industry profitability". In investment banking it cited both the diminished business opportunities as well as higher capital costs and in private banking "lower invested assets coupled with negative trends for margins as clients opt for simpler, lower-risk and lower-margin products".

The net new money outflows in wealth management, leading to concerns regarding the core strength of the Swiss firm in attracting private banking clients, were already flagged to investors in April (see the FinanceAsia story on April 16).  But what was not outlined in as much detail in the earnings preview was the breakdown of the net fee and commission income, which captures the environmental change for revenues which UBS alluded to.

Underwriting fees at SFr455 million was the only fee category to increase in this quarter over the fourth quarter 2008. Equity underwriting fees increased 20% and debt underwriting fees 117%, as market volatility saw issuers seek firm underwriting, and tight liquidity conditions ensured that those who provided it charged aggressively. Other commission expenses fell 23% to SFr340 million on account of lower volumes in the equities business in investment banking.

Mergers and acquisitions and corporate finance fees fell 35% to SFr230 million, as deal volume diminished. Brokerage fees fell 26% to SFr1.1 billion. UBS attributed this to lower fees in cash equities and lower transaction volumes in wealth management. But specialists also suggest that in an environment of heightened risk sensitivity, perception of counterparty risk is becoming critical.

Investment fund fees fell 13% to SFr1 billion on account of lower asset-based fees across the asset management and private banking businesses. On a lower asset base for wealth management, portfolio management and advisory fees fell 11% to SFr1.4 billion.

During the course of April, UBS has already announced senior-level management changes. Ulrich Korner has joined as group chief executive officer and Alex Wimott-Sitwell and Carsten Kengeter have been promoted to co-heads of investment banking, replacing Jerker Johansson.

UBS was cautiously optimistic in its outlook, citing the improvement in investor sentiment due to stimulus packages from various governments and resultant increased liquidity but tempering this by adding that "the real economy has continued to deteriorate, and this is expected to have negative implications for credit-related provisioning in coming quarters". 

UBS's share price gained around 2.5% to SFr16 in trading on the Swiss Exchange yesterday after it declared the results, as investors expressed relief that there were no surprises -- and that maybe the worst is over.

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