UBS defies bonus slashing in wake of scandal

UBS executives said that last month’s $2.3bn unauthorised trading loss would not force the bank to dramatically rein in bonuses, as it set aside nearly 90 per cent of its investment banking revenues for staff pay.

The Swiss group defied analysts’ expectations that it would slash bonuses in the wake of the scandal by revealing that the investment bank accrued SFr1.35bn in personnel expenses in the third quarter.

That is just SFr170m less than the SFr1.52bn in total revenues earned by the division, which UBS is slimming down.

The investment bank posted a third quarter pre-tax loss of SFr2.4bn, including the alleged rogue-trading loss but excluding an accounting technicality that handed the group a one-off gain.

“Clearly they don’t care about their shareholders,” said one bank analyst. “It doesn’t exactly show leadership from the top on sharing the pain, does it?”

Senior executives at UBS emphasised on Tuesday that the bank had to remain competitive on pay to retain its top performers, who were already demoralised in the wake of the trading scandal.

People familiar with the bank’s pay structure noted that a sizeable chunk of the pay set aside in the third quarter related to deferred awards from prior years, which could not be reduced. Still, analysts noted that the bank accrued SFr718m for bonuses across the group in the third quarter, down just 17 per cent quarter on quarter.

“UBS continues to struggle with its cost base in investment banking, and to allocate its weakened revenue pool effectively between shareholders, staff and franchise rebuild investments,” said analysts at Barclays Capital.

“The bonus pool seems to have been largely protected from the rogue trading loss, with a further positive accrual in 3Q rather than any kind of clawback.”

The Swiss banking group’s earnings compared with analysts’ estimates of around SFr300m, but were distorted by a large number of one-off items, complicating comparisons with previous periods.

The results were also better than the bank’s own indication earlier this month, issued in response to the discovery of a $2.3bn unauthorised trading loss at its London equity derivatives operation, that it would make a “modest” profit in the period.

Third-quarter earnings were flattered by a higher-than-expected SFr1.77bn gain booked on changes to the value of the bank’s own debt, as well as a slightly lower-than-expected SFr387m in restructuring charges.

Group pre-tax profits of SFr980m compared favourably to the SFr818m made in the same period last year. At the net level, the year earlier results had been boosted by a surprise SFr825m tax gain. By contrast, UBS paid SFr40m in tax in the third quarter of this year.

Shares in UBS rose 2.15 per cent to SFr11.38 in early Zurich trading.

The bank warned future earnings would be unusually vulnerable to broader macroeconomic factors, with particular uncertainties in the US and Europe over government debt and fiscal policies.

“Current market conditions and trading activity are unlikely to improve materially, potentially creating headwinds for growth in revenues and net new money,” the bank cautioned.

But Sergio Ermotti, UBS’s acting chief executive, expressed confidence about the group’s direction.

“We are well positioned in areas of future growth and our targeted investments, together with our focus on efficiency, will strengthen the firm. I am very confident about the future of our business.”

As expected., Mr Ermotti disclosed nothing about UBS plans radically to reshape its beleaguered investment bank, a strategy accelerated since the discovery of the unauthorised trading loss. Further information is expected at a November 17 investor presentation in New York.

UBS’s investment banking results were relegated to last place in the group’s traditional description of its individual businesses. The operation suffered a SFr605m pre-tax loss, compared with a loss of SFr403m in the same period last year.

Excluding this year’s unauthorised trading loss, and one-off gains or charges from changes to the value of the bank’s own debt, the pre-tax loss amounted to SFr566m, compared with a SFr19m loss last year. As with other investment banks, and as expected, UBS reported sharply lower revenues because of difficult markets and cautious clients.

Wealth management, excluding the US, proved resilient. Net new money amounted to SFr3.8bn, down from SFr5.8bn in the previous quarter but still respectable given difficult markets and the reputational damage of the unauthorised trading affair. Pre-tax profits amounted to SFr888m

As in the previous quarter, Asian clients and the bank’s very wealthiest customers continued to deposit funds, while clients in Switzerland’s European neighbours withdrew assets. “Onshore” European operations were hit in particular by the SFr1.5bn loss of funds “related to the departure of client advisers who had joined as part of a past acquisition in Germany”.

Analysts said the withdrawal was related to the departure of 12 bankers from the former Sauerborn Trust, bought by UBS some years ago. The bank warned a further SFr1bn of withdrawals would follow in the current quarter.

The group’s capital position continued to improve. UBS’s BIS tier one capital ratio – a measure of financial strength – rose to 18.4 per cent from 18.1 per cent at the end of June, while the core tier one ratio – a more stringent measure – improved to 16.3 per cent from 16.1 per cent.

UBS shares closed down 0.3 per cent at SFr11.11.