It could be worse for UBS. Ok, the Swiss bank has on Tuesday warned that, after posting a forecast-busting SFr5.6bn in net profit for the second quarter, a “very weak trading result” in its investment bank could hit second half earnings should the current turbulent conditions persist.
But hey – we could have guessed that. And surrounded by a slow drip of unexpected bad news, UBS seems to be in the (relatively) happy position of having got the bulk of its dirty laundry out there, washed and on the line several months ago. The bank back in early May said it was abandoning its attempt to set up a hedge fund business, folding Dillon Read Capital Management back into its investment banking arm.
That decision came after DRCM reported a SFr150m loss in the first three months of the year. Hugely embarrassing for the bank at the time, the move now looks rather prescient. After all, SFr150m is only about $125m. Given that the DRCM outfit had already been failing to perform, imagine the kind of pickle they could have got themselves into had they still been in operation in recent weeks.
All in all, a SFr384m pre-tax charge for the closure of the unit, which UBS said on Tuesday is now complete, and further losses on DRCM’s former portfolios to the tune of SFr230m in the second half might be seen as something of a result. Long way shy of the $2bn Goldman has just stumped up in any case.
But the dreary outlook and revelations of the DRCM losses overshadowed the strong second quarter numbers on Tuesday morning.
Going into the results, analysts at Dresdner Kleinwort expressed concern that DRCM’s legacy book would leave UBS exposed to the ongoing credit market difficulties. The rather bleak outlook for the investment bank, with doubts about the bank’s fixed income strategy, leaves UBS reliant on its core wealth management unit, they added, given the anticipated lack of growth in business banking and in the US wealth management business.
UBS shares dropped 3 per cent as trading got underway on Tuesday as investors digested the extent of the investment banking operation’s drag on the overall business, and analysts started to reassess their second half profit estimates.