UBS posts $17 billion loss and restructures

Investment banking drives losses at UBS, while wealth and asset management report large net new money outflows. Cash bonuses to investment bankers are reduced by 95%.

UBS yesterday posted a net loss of SFr19.7 billion ($16.8 billion) for 2008, up 375% from the 2007 loss of SFr5.2 billion, with the fourth-quarter shortfall alone coming to SFr8.1 billion.

"Losses were mainly due to negative revenues in the fixed income, currencies and commodities areas of the investment bank," said the Swiss bank in a written statement. During 2008, UBS managed to reduce operating expenses for the overall firm by 22%, primarily because its salary bill fell 36% to SFr16.2 billion on account of lower payouts in the investment bank.

The pre-tax loss in the investment banking division doubled to SFr33.7 billion last year from SFr16.7 in 2007, despite a reduction in personnel expenses to SFr4.9 billion from SFr11.3 billion.

UBS reiterated that investment banking remains a core business but added that it will be reducing its use of balance sheet and further reducing headcount to 15,000 by the end of 2009 from around 17,000 currently. UBS has already exited a number of fixed-income businesses including proprietary trading, some commodities businesses, real estate and securitisation as well as exotic structured products.

The Swiss bank let go of another 1,782 people during the fourth quarter of 2008, mostly in investment banking. This is marginally less than the 2,000 people it had announced it would reduce in early October last year.

Jerker Johansson, CEO of the investment bank, explained the bank's strategy in a written statement: "We are focusing on three businesses: our investment banking department and equities activities, with their very strong global franchises, as well as our client-facing fixed-income areas, including our world-class foreign exchange business."

UBS's two core businesses -- wealth management and asset management -- saw large net new money outflows during the course of 2008 and specifically in the fourth quarter, although it is likely that some of this was due to losses on mark-to-market positions. Net new money (which UBS defines as the net amount of invested assets that are acquired by the bank from new clients, invested assets that are lost when clients terminate their relationship with UBS and the inflows and outflows of invested assets from existing UBS clients) fell by SFr58.2 billion in Q4 for wealth management and by SFr27.6 billion for asset management.

This resulted in a total decline in net new money of SFr226 billion for the financial year, as compared to an increase of SFr140.6 billion in fiscal 2007.

Profit before tax for UBS's wealth management division and business banking fell by 28% year-on-year to SFr4.5 billion for 2008. For the asset management business, profit before tax fell 8% to SFr1.3 billion, but this number would have been about one-third lower if non-recurring items were taken into account.

UBS stresses that 2009 has started well for both its wealth and asset management businesses with positive net new money in January. The Swiss bank also announced a restructuring intended to "refocus UBS on its Swiss core business, its international wealth management franchise in Switzerland and on the growth potential of its onshore business globally".

UBS is creating a new structure into which it will roll all its wealth management businesses as well as the Swiss private and corporate client business. Franco Morra has been appointed CEO Switzerland to head the wealth management business for domestic clients and to represent UBS to Swiss stakeholders. Juerg Zeltner will become CEO wealth management global, in charge of all of UBS's domestic wealth management businesses outside of Switzerland and the Americas. Wealth management for the Americas will be under the leadership of Marten Hoekstra. All three have been made members of UBS's group executive board.

Meanwhile, yesterday, the Swiss Financial Market Supervisory Authority (Finma), the banking regulator, which has been appointed by the Swiss government to approve bonus payments at UBS as part of the bank's bailout package, released its diktat on compensation.

Finma has allowed UBS to pay employees variable remuneration to the tune of SFr1 billion that had been committed earlier and which the Swiss bank is legally obliged to pay. Of this, SFr700 million will be paid in cash. UBS is also allowed to pay out a further SFr1.2 billion in cash as discretionary payments, mostly to lower and mid-ranking employees. Discretionary payments are capped based on the employment level and Finma clarified that the limits are largely intended to affect employees in the middle and upper salary segments.

Finma also said that cash payments to employees will be down by over 80% compared with the previous year and, for investment banking, the reduction is 95%. Finma has also limited deferred compensation components, which will be distributed over several years only if defined conditions are met.

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