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UBS Reports a Fourth Quarter Loss of CHF 8.1 Billion; Excluding Certain Substantial Items, Adjusted Net Operating Results (Pre-Tax) Were Negative CHF 2.8 Billion
Posted by: gurufocus (IP Logged)
Date: February 10, 2009 12:01AM

ZURICH & BASEL, Switzerland--(BUSINESS WIRE)--UBS AG (NYSE:UBS): Fourth quarter 2008 results Press Release: UBS Reports a Fourth Quarter Loss of CHF 8.1 Billion; Excluding Certain Substantial Items, Adjusted Net Operating Results (Pre-Tax) Were Negative CHF 2.8 Billion

ZURICH & BASEL, Switzerland--(BUSINESS WIRE)--UBS AG (NYSE:UBS):

Fourth quarter 2008 results

  • Excluding certain substantial items, adjusted net operating results (pre-tax) were negative CHF 2,806 million.
  • Fourth quarter net loss attributable to UBS shareholders of CHF 8,100 million, including a CHF 1,727 million net income tax benefit.
  • Fourth quarter net new money outflows of CHF 58.2 billion from Global Wealth Management & Business Banking and CHF 27.6 billion from Global Asset Management; the net new money trend improved progressively over the fourth quarter and net new money was positive in January for both businesses.

Full-year 2008 results

  • Group net loss attributable to UBS shareholders of CHF 19,697 million for full-year 2008, due primarily to losses on risk positions in the Investment Bank.
  • Lower invested assets drove reductions in revenue and profit from Global Wealth Management & Business Banking and Global Asset Management in 2008.
  • Significantly lower performance-based compensation drove cost reductions across all business divisions in 2008.

Risk positions

  • Substantial reduction in risk positions during the fourth quarter in addition to the transaction with the Swiss National Bank; first transfer of securities to the fund owned and controlled by the SNB completed in December 2008.
  • Remaining risk concentrations exposures in leveraged finance and monolines contributed to losses of CHF 3.7 billion (USD 3.2 billion) in the fourth quarter.
  • The reclassification of certain financial assets during the fourth quarter led to lower trading losses but higher impairment charges.

Capital and balance sheet

  • Strong capital ratio for year-end 2008, with a tier 1 ratio of 11.5% and a total capital adequacy ratio of 15.5%.
  • Total risk-weighted assets under Basel II declined 9% during the fourth quarter to CHF 302 billion.

Cost reduction

  • Fourth quarter personnel expenses down 41% from the previous quarter; full-year 2008 personnel expense down 36% from 2007.
  • Personnel reductions totaled 1,782 during fourth quarter.

Outlook

  • UBS has had an encouraging start to the year, and net new money was positive in January in both our wealth management and asset management businesses. However, financial market conditions remain fragile as company and household cash flows continue to deteriorate. On the other hand, governments are taking very substantial measures to ease fiscal and monetary conditions. Our near-term outlook remains cautious, and UBS will continue its program to strengthen its financial position through reductions in risk positions, risk weighted assets, total assets and operating costs. This will allow us to focus management and other resources on securing and building the firm's core client businesses.

Strategy

  • UBS created two new business divisions: Wealth Management & Swiss Bank under the leadership of Franco Morra and Juerg Zeltner, and Wealth Management Americas, led by Marten Hoekstra. Each of the three executives are members of the Group Executive Board.
  • The new structure re-focuses UBS on its Swiss core businesses, on the large scale and strengths of its international wealth management franchise in Switzerland, and on the growth potential of its on-shore business globally.
  • The Investment Bank has made substantive progress in de-risking and de-leveraging its balance sheet, and its overall structure has been greatly simplified. Achievable targets have been set for 2009 for further reducing headcount and its use of balance sheet and overall risk.
  • UBS confirmed the Board of Directors’ and the Group Executive Board’s commitment to each of UBS’s business divisions and strategy. Despite difficult market conditions, UBS has made substantial progress in adjusting its operations and has prepared itself for the new market environment.

Refer to separate UBS media release published on Tuesday 10 February 2009 for more information on UBS's strategic announcements.

UBS reports a full-year loss of CHF 19,697 million and fourth quarter loss of CHF 8,100 million.

Full-year 2008 results

Net loss attributable to UBS shareholders was CHF 19,697 million for full-year 2008. This result compares with a loss of CHF 5,247 million in the prior year. Net losses from continuing operations totaled CHF 19,327 million, compared with losses of CHF 5,111 million in the prior year.

Losses were mainly due to negative revenues in the fixed income, currencies and commodities (FICC) area of the Investment Bank. The Investment Bank reduced its risk exposures significantly in 2008. Lower invested assets drove reductions in revenue and profit from Global Wealth Management & Business Banking and Global Asset Management in 2008.

Total operating expenses were down 22% as personnel expenses decreased 36% to CHF 16,262 million from CHF 25,515 million. This was primarily due to lower performance-related compensation, mainly in the Investment Bank.

Fourth quarter 2008 results

Net loss attributable to UBS shareholders was CHF 8,100 million, down from a net profit of CHF 296 million. Net loss from continuing operations was CHF 7,997 million compared with a profit of CHF 433 million.

The Investment Bank recorded a pre-tax loss of CHF 7,483 million, compared with a pre-tax loss of CHF 2,748 million in the prior quarter. This result was primarily due to trading losses, losses on exposures to monolines and impairment charges taken against leveraged finance commitments. An own credit charge of CHF 1,616 million was recorded by the Investment Bank in fourth quarter 2008, mainly due to redemptions and repurchases of UBS debt during this period.

Global Wealth Management & Business Banking recorded a decline in pre-tax profit to CHF 1,133 million from CHF 1,861 million. This was mainly due to credit losses on lombard loans, lower asset-based fees and a total charge of CHF 605 million related to auction rate securities (ARS). The ARS-related charge includes general and administrative expenses of CHF 545 million and trading losses of CHF 60 million and was recognized by Wealth Management US in addition to the provisions taken during second quarter 2008.

Pre-tax profit for Global Asset Management decreased to CHF 236 million from CHF 415 million. The decline was mainly due to lower asset-based fees and reflects a third quarter gain of CHF 168 million due to the sale of UBS's minority stake in Adams Street Partners.

The transaction with the Swiss National Bank (SNB) and the fair valuation of the mandatory convertible notes (MCNs) placed with the Swiss Confederation resulted in an overall net charge of CHF 4.2 billion to UBS's income statement, the majority of which was attributed to the Corporate Center. Restructuring charges of CHF 737 million also affected fourth quarter results and divestments contributed a net gain of CHF 227 million. This reflects a gain on the sale of UBS's stake in Bank of China, which was partly offset by losses related the exiting of certain commodities businesses by the Investment Bank.

Excluding the net overall charge related to the SNB transaction and the issuance of MCNs, the own credit charge, the ARS-related charges, the restructuring charges and divestments mentioned above, UBS's adjusted operating results (pre-tax) were negative CHF 2,806 million.

At the Group level, a credit loss expense of CHF 2,310 million was recognized in fourth quarter 2008, of which CHF 1,329 million was due to impairment charges on reclassified financial instruments, mainly on leveraged finance positions.

Operating expenses were down significantly compared with the prior quarter as personnel expenses decreased 41% to CHF 2,378 million in fourth quarter 2008. This was primarily due to lower performance-related compensation. Some of the accruals made in the first nine months of 2008 were reversed, particularly within the Investment Bank.

UBS recognized an income tax benefit of CHF 1,727 million in fourth quarter 2008.

Global Wealth Management & Business Banking recorded net new money outflows of CHF 58.2 billion in the fourth quarter, comprising CHF 58.3 billion in net outflows from Wealth Management International & Switzerland, CHF 4.1 billion in net inflows from Wealth Management US, and CHF 4.0 billion in net outflows from Business Banking Switzerland. Global Asset Management saw net new money outflows of CHF 27.6 billion in the fourth quarter. Outflows of institutional net new money were CHF 16.7 billion, while outflows in wholesale intermediary were CHF 10.9 billion.

Substantial items affecting fourth quarter operating results

Excluding the net overall charge related to the SNB transaction and the issuance of MCNs, the own credit charge, the ARS-related charges, the restructuring charges and divestments mentioned above, UBS's adjusted net operating results (pre-tax) were negative CHF 2,806 million.

The transaction with the Swiss National Bank and the issuance of mandatory convertible notes to the Swiss Confederation resulted in a net overall charge of CHF 4.2 billion to UBS's income statement. This reflects the costs of the equity purchase option, partially offset by the year-end value of that option, the loss arising from valuation differences on assets sold to the SNB StabFund, losses on hedges that were subject to trading restrictions as a result of the SNB transaction, and the impact of the contingent issuance of UBS shares in connection with the transaction. The fair valuation impact of the issuance of the MCNs is also included in this total.

An own credit charge of CHF 1,616 million was recorded by the Investment Bank in fourth quarter 2008, mainly due to redemptions and repurchases of UBS debt during this period.

Expenses for auction rate securities totaled CHF 605 million in the fourth quarter. This includes general and administrative expenses of CHF 545 million and trading losses of CHF 60 million. Wealth Management US has recognized these expenses in addition to the provisions taken during the second quarter.

Restructuring charges of CHF 737 million were recorded by the Investment Bank during the fourth quarter.

Divestments contributed a net gain of CHF 227 million to the Investment Bank. This reflects the gain on sale of UBS's stake in Bank of China, which was partly offset by losses related the exiting of certain commodities businesses by the Investment Bank.

Risk positions significantly reduced

On 16 December 2008, the SNB StabFund acquired a first tranche of 2,042 securities positions from UBS for USD 16.4 billion. UBS and the SNB have agreed that UBS's student loan auction rate securities (ARS) positions and securities currently insured by monolines will not be sold to the fund. As a result, the overall amount of positions already transferred or still expected to be transferred to the SNB StabFund has been reduced to USD 39.1 billion.

As a result of the transaction with the SNB and UBS's ongoing risk reduction efforts, risk exposures have been significantly reduced over the quarter. Leverage finance and monoline remain risk concentrations. Exposures in leveraged finance and monolines contributed to losses of CHF 3.7 billion (USD 3.2 billion) in the fourth quarter.

Effective 1 October 2008, UBS reclassified eligible assets which it intends to hold for the foreseeable future with a fair value of USD 15.8 billion on that date from "held for trading" to the "loans and receivables" category. In addition, student loan ARS with a fair value of USD 7.9 billion have been reclassified per 31 December 2008. In fourth quarter 2008, an impairment charge of USD 1.2 billion was recognized as credit loss expense on reclassified financial instruments. If reclassification had not occurred, the impairment charge would not have been recognized but a trading loss of USD 4.2 billion would have been recorded in UBS's fourth quarter income statement. Net interest income after reclassification amounted to USD 0.3 billion. In the fourth quarter, the operating profit before taxes would have been USD 3.2 billion lower if the reclassification would not have occurred.

Capital base and balance sheet

UBS's capital ratio remains strong with a year-end tier 1 ratio of 11.5% and total capital adequacy ratio of 15.5%.

UBS continued its deliberate balance sheet reductions during fourth quarter 2008 and reduced significantly its trading portfolio and collateral trading assets by a further CHF 269 billion (mainly in the Investment Bank). These large reductions were, however, masked by a significant rise in replacement values (increasing to a similar extent on both sides of the balance sheet), as market movements drove up positive replacement values by 51%, or CHF 290 billion in the fourth quarter alone, to reach CHF 854 billion at year-end 2008.

Total risk-weighted assets (RWA) under Basel II decreased 9% from the previous quarter, to CHF 302 billion. This reflects UBS's ongoing risk reduction efforts and the SNB transaction.

Cost reduction

Personnel expenses decreased 41% to CHF 2,378 million from CHF 3,997 million. This was primarily due to lower performance-related compensation. Some of the accruals made in the first nine months of 2008 were reversed, particularly in the Investment Bank.

Personnel numbers reduced to 77,783 on 31 December 2008, down by 1,782 from 30 September 2008, with most staff reductions in the Investment Bank.

Outlook

UBS has had an encouraging start to the year, and net new money was positive in January in both our wealth management and asset management businesses. However, financial market conditions remain fragile as company and household cash flows continue to deteriorate. On the other hand, governments are taking very substantial measures to ease fiscal and monetary conditions. Our near-term outlook remains cautious, and UBS will continue its program to strengthen its financial position through reductions in risk positions, risk weighted assets, total assets and operating costs. This will allow us to focus management and other resources on securing and building the firm's core client businesses.

UBS financial highlights
    As of or for the quarter ended   % change from   Year ended
CHF million, except where indicated   31.12.08   30.9.08   31.12.07   3Q08   4Q07   31.12.08   31.12.07
 
Performance indicators from continuing operations          
Diluted earnings per share (CHF) 1   (2.56 )   0.09     (6.04 )       58     (7.17 )   (2.61 )

Return on equity attributable to UBS shareholders
(%) 2

                        (54.4 )   (11.7 )
Cost / income ratio (%) 3   N/A 4   102.1     N/A 4           608.6     111.0  
Net new money (CHF billion) 5   (85.8 )   (83.6 )   15.5             (226.0 )   140.6  
 
Group results          
Operating income   (4,079 )   5,556     (4,132 )       1     1,545     31,721  
Operating expenses   5,645     6,036     8,918     (6 )   (37 )   27,638     35,463  

Operating profit before tax (from continuing and
discontinued operations)

  (9,705 )   (480 )   (13,016 )       25     (25,894 )   (3,597 )
Net profit attributable to UBS shareholders   (8,100 )   296     (12,967 )       38     (19,697 )   (5,247 )
Personnel (full-time equivalents) 6   77,783     79,565     83,560     (2 )   (7 )        
Invested assets (CHF billion)   2,174     2,640     3,189     (18 )   (32 )        
 
    As of   % change from        
CHF million, except where indicated   31.12.08     30.9.08     31.12.07     30.9.08     31.12.07          
 
UBS balance sheet and capital management          
Balance sheet key figures          
Total assets   2,015,549     1,996,719     2,274,891     1     (11 )        
Equity attributable to UBS shareholders   34,431     46,412     36,875     (26 )   (7 )        
Market capitalization 7   43,519     54,135     108,654     (20 )   (60 )        
BIS capital ratios 8          
Tier 1 (%)   11.5    

10.8 9

 

 

9.1 10

 

               
Total BIS (%)   15.5    

14.9 9

 

 

12.2 10

 

               
Risk-weighted assets   302,273     332,451    

374,421 10

 

  (9 )   (19 )        
Long-term ratings          
Fitch, London   A+   AA-     AA                
Moody's, New York   Aa2   Aa2     Aaa                
Standard & Poor's, New York   A+   AA-     AA                
           

1 Refer to note 8 of the fourth quarter 2008 financial report for more information on the earnings per share calculation. 2 Net profit attributable to UBS

shareholders from continuing operations year-to-date (annualized as applicable) / average equity attributable to UBS shareholders less distributions (estimated as

applicable). 3 Operating expenses / operating income before credit loss expense or recovery. 4 The cost / income ratio is not meaningful due to negative

income. 5 Excludes interest and dividend income. 6 Excludes personnel from private equity (part of Corporate Center). 7 Refer to the "UBS registered shares"

section of the fourth quarter 2008 financial report for further information. 8 Refer to the “Capital management” section of the fourth quarter 2008 financial report for

further information. 9 Reflects the capital ratios according to Basel II data only. Taking into account the effects from the transitional provisions of the capital floor,

which require that during the year 2008 Basel II capital requirements have to amount to at least 90% of Basel I capital requirements, the tier 1 capital ratio would

amount to 10.2% and the total capital ratio to 14.0%, respectively. 10 The calculation prior to 2008 is based on the Basel I approach.

UBS financial highlights (USD)  
USD-convenience translation (spot rate of CHF/USD as of 31.12.08):   1.07  
    As of or for the quarter ended  
USD million, except where indicated   31.12.08  
 
Performance indicators from continuing operations  
Diluted earnings per share (USD) 1   (2.39 )
Return on equity attributable to UBS shareholders (%) 2   (54.4 )
Cost / income ratio (%) 3   N/A 4
Net new money (USD billion) 5   (80.2 )
 
Group results  
Operating income   (3,812 )
Operating expenses   5,276  
Operating profit before tax (from continuing and discontinued operations)   (9,070 )
Net profit attributable to UBS shareholders   (7,570 )
Personnel (full-time equivalents) 6   77,783  
Invested assets (USD billion)   2,032  
 
UBS balance sheet and capital management  
Balance sheet key figures  
Total assets   1,883,691  
Equity attributable to UBS shareholders   32,179  
Market capitalization 7   40,672  
BIS capital ratios 8  
Tier 1 (%)   11.5  
Total BIS (%)   15.5  
Risk-weighted assets   283,178  
   

1 Refer to note 8 of the fourth quarter 2008 financial report for more information on the earnings per share calculation. 2 Net profit attributable to UBS

shareholders from continuing operations year-to-date (annualized as applicable) / average equity attributable to UBS shareholders less distributions (estimated as

applicable). 3 Operating expenses / operating income before credit loss expense or recovery. 4 The cost / income ratio is not meaningful due to negative

income. 5 Excludes interest and dividend income. 6 Excludes personnel from private equity (part of Corporate Center). 7 Refer to the "UBS registered shares"

section of the fourth quarter 2008 financial report for further information. 8 Refer to the "Capital management" section of the fourth quarter 2008 financial report for

further information.

Business division results: Global Wealth Management & Business Banking

4Q08 vs 3Q08

Pre-tax profit for Global Wealth Management & Business Banking was CHF 1,133 million in fourth quarter 2008 – a decrease of 39% from the prior quarter.

Wealth Management International & Switzerland's pre-tax profit declined 36% to CHF 712 million from CHF 1,110 million. This decrease was mainly due to credit losses on lombard loans (loans granted against pledged items, mostly in the form of securities), as well as reductions in income earned on the significantly lower asset base. Partly offsetting these losses was a reduction in personnel expenses, which resulted from significantly lower variable compensation accruals. Wealth Management US recorded a pre-tax loss of CHF 341 million compared with a pre-tax profit of CHF 203 million in the third quarter. Excluding the ARS-related charges, pre-tax profit would have increased 30% to CHF 264 million. This result reflects lower personnel costs, including lower performance-related compensation accruals, while revenues were resilient during the quarter. Business Banking Switzerland's pre-tax profit increased 39% to CHF 762 million, mainly due to the revaluation of UBS's participation in the SIX Swiss Exchange. In addition, operating expenses decreased due to higher charges out to other businesses and lower personnel expenses reflecting reduced variable compensation.

FY08 vs FY07

Wealth Management International & Switzerland's full year pre-tax profit was CHF 4,518 million in 2008, a decrease of 28% from CHF 6,310 million in 2007. This decline was driven by a 16% drop in income due to lower asset-based fees and transactional income, while credit loss expenses were CHF 389 million, compared with CHF 1 million in 2007. During the same period, operating expenses were reduced by 10% due largely to lower personnel costs. For full-year 2008, Wealth Management US recorded a pre-tax loss of CHF 698 million compared with a pre-tax profit of CHF 674 million in 2007. Driving the decline were the combined ARS-related expenses and trading losses of total CHF 1,524 million taken during 2008. Excluding these expenses and trading losses, the pre-tax result would have increased 23%. Business Banking Switzerland's full year pre-tax profit increased 8% to CHF 2,449 million in 2008.

Business division results: Global Asset Management

4Q08 vs 3Q08

Pre-tax profit decreased 43%, or CHF 179 million, to CHF 236 million. Excluding the gain from the sale of a minority stake in Adams Street Partners in third quarter, pre-tax profit would have decreased CHF 11 million.

The decrease in underlying pre-tax profit was mainly due to a decline in management fees, as the average invested assets base declined due to the impact of negative financial market developments, currency fluctuations and net new money outflows, coupled with higher operational losses. These were partly offset by a reduction in personnel costs, which were mainly driven by lower incentive based compensation accruals and the impact of the firm's ongoing expenditure review.

FY08 vs FY07

Pre-tax profit for full



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