Switzerland's largest bank UBS has announced plans to cut jobs and push back their 2014 profit target. Net income fell to 1.02 billion Swiss francs ($1.27 billion) in the second quarter.
Analysts overestimated the company's net income by 27 million Swiss francs. One year ago, net income was 2.01 billion Swiss francs, roughly double that of this year's amount. Net profit dropped 49% due to a strong Swiss franc and slow trading in currencies and commodities. UBS stock fell 12% over the past year.
Europe's debt crisis is being blamed for the reduction in revenues from trading and selling stocks, bonds, currencies and commodities. UBS investment bank's pretax profit dropped from over 1.3 billion Swiss francs in the year-earlier period to a mere 376 million Swiss francs in this year's second-quarter.
UBS CEO Oswald Gruebel and Carsten Kengeter, who runs the investment bank segment of UBS, may have to slash the 15 billion Swiss franc pretax profit goal for 2014 by as much as 20%, or scrap it completely.
Germany's largest bank, Deutsche Bank, who reported a second-quarter profit of €1.2 billion, admits that the European debt crisis will also affect its investment bank's progress to reach profit targets.
Due to weaker-than-expected UBS and BP reported earnings this week, as well as uncertainty in the US over the nation's debt limit, European shares have lowered. Both BP and UBS had their stock prices drop by at least 2% on July 26. According to Deutsche Postbank AG Equity Strategist Heinz-Gerd Sonnenschein, “It's a difficult situation for European banks at the moment because of the risk aversion of market participants.”
UBS investment bank has incurred over 57 billion Swiss francs in losses since 2009. Although UBS's revenue share from trading stocks and bonds and client advisement on capital-market transactions has doubled from 2009 to 2010, it remains the lowest among the nine-largest investment banks. In addition, UBS has been in the news for losing a series of high-profile bankers to rival banks.
UBS does not expect major improvements in market conditions for the third quarter. The summer months are typically relatively inactive, temporarily dipping line charts for the quarter.
UBS to Make Major Job Cuts
CEO Oswald Gruebel has responded to what he calls a “weakening economic outlook” by announcing plans to cut roughly 2 billion Swiss francs in costs over the next two to three years.
The investment bank's cost-to-unity ratio was among the highest in the nine major investment banks last year and rose 85% last quarter. About 6% of investment bank jobs were cut in the first quarter of the year. UBS estimates that they may need to cut another 700 positions in the investment bank sector and roughly 5,000 jobs throughout the company in a move to save the bank 1 billion Swiss francs in annual labor costs.
UBS is also considering the implementation of restructuring charges and cost cuts throughout all divisions. Chief Financial Officer Tom Naratil says the bank's assessment is still in the early stages. Ralph Silva, an analyst from Silva Research Network, believes that it will take at least five years for UBS to turn itself around. Gruebel believes that it is time for the bank to consider the size of trading operation necessary to support asset and wealth management. He claims that at least half of what the unit does is crucial to UBS operations.
CFO Tom Naratil says that labor cost reductions will not affect client advisers in wealth management. Wealth management units reported net new earnings of 8.2 billion Swiss francs in the second quarter. According to Naratil, the bank's overall net new money trends are positive and intact.
Key Results – 2011 European Bank Stress Testing (source: European Banking Authority EBA)
- 90 banks from 21 countries were surveyed.
- At the end of last year, 20 banks fell below the 5% Core Tier 1 Ratio, or CT1R, threshold during the two-year testing period. The total overall shortfall is roughly €26 billion.
- Between January and April of this year, an additional €50 billion of capital was raised; Capital-raising actions were implemented by the end of April.
- Over the two-year horizon, 8 banks were found to have capital thresholds below the 5% CT1R, with an overall CT1 deficit of €2.5 billion.
- 16 banks have a CT1R between 5 and 6%.
- The EBA has issued formal recommendations based on these results stating that banks whose CT1R falls below the 5% threshold should be required by national supervisory authorities to immediately fix their capital deficit.
