Swiss banking giant UBS has lost over $2 billion due to actions of a trader it employs, sending shock waves that reverberated throughout the trading day. Although UBS has declined to mention any particulars about the individual involved, 31 year old trader Kweku Adoboli was arrested by London police in relation to the fraud.
UBS AG shares dropped roughly 9%, closing at $11.41 on September 15.
UBS has been struggling to maintain investor confidence during the financial crisis, which has cost the company over $5 billion. This incident sheds doubt that UBS will incur a third-quarter loss. More importantly, long-term investor confidence may be damaged as the fraud raises questions about the bank's, and the industry's, security.
Investors were immediately reminded of the Jerome Kerviel bank fraud, which cost French bank Societe Generale some €4.9 billion ($6.7 billion) three years ago. Since then, the industry has spent tens of millions of euros to improve security measures by targeting IT systems and maintaining risk management jobs during the recession. "It is astonishing given the technology, the systems, the emphasis on risk. UBS has been focusing on it post-crisis, [and] they have put more focus on it than a lot of other banks," an industry source was quoted as saying to Reuters.
Simon Morris, CMS Cameron McKenna law firm partner, holds UBS accountable for the security breach: “No rogue trader works in a vacuum, and UBS management must have taken its eye off the ball to allow a trader to operate on this scale without sufficient supervision and without the systems to monitor his trades.”
Others believe the very nature of the industry pushes some employees to extreme actions to stay ahead of the pack. As UBS and shareholders carry the expense of unauthorized deals, the bank must now find ways to eliminate unnecessary costs.
UBS Cuts 3,500 Jobs
Rising regulatory costs, a costly Swiss franc and the global financial crisis have convinced UBS to eliminate 3,500 jobs to retain 2 billion francs ($2.5 billion).
In July, UBS revealed low second-quarter profits, and like many other Swiss banks, UBS has come to regret its hiring binge, which occurred shortly after it nearly collapsed in 2009. Many banks are slimming down to prepare for a continuation of this year's rough economic outlook. Analyst Peter Thorne, from Swiss brokerage firm Helvea, told Reuters: “Since UBS announced their 2 billion franc cost saving initiative, the economic environment deteriorated even further, making these plans seem inadequate.”
Roughly 45% of the job cuts will be in UBS's investment bank, 35% from wealth management and 10% each for wealth management in the Americas and global asset management. Rainer Skierka, an analyst at Swiss private bank Sarasin, is stunned that UBS is cutting roughly 1,225 employees in wealth management, which amounts to savings of roughly 165 million Swiss francs ($189 million), because wealth management has more steady revenue and is much less capital intensive than investment banking.
UBS is considering a restructuring charge of roughly 550 million francs ($631 million), with 450 million francs ($516 million) being booked later this year. Investor Day, which will be held in November, will give investors more insight into UBS's plans for its fixed income unit, which is currently under review.
According to recent JP Morgan analysis, UBS's fixed costs could increase to 65% of total compensation, a 10% increase from 2009. Although stocks improved after the job cut announcement at the end of August, the rogue trader incident temporarily caused shares to drop.
Businessweek forecasts an increase in quarterly earnings per share in the third and fourth quarter.
Key Statistics – UBS Financial Statements (source: Bloomberg Businessweek)
- Although total revenues for 2010 were almost 32 billion francs, their net income was only 7.5 billion francs, up from a negative 2.7 billion francs from the year-earlier period.
- As of June 30th, 2011, UBS reported a 0.48% return on assets and a return on equity exceeding 12%.
- UBS second quarterly earnings were only $0.26 per share, down $0.21 from the first quarter and down $0.23 from a year earlier.
- Annual revenue is expected to drop by $2 billion in 2011, then increase the next year by the same amount. Annual earnings per share observe a similar phenomenon with shares dropping to $1.45 in 2011, and rising to $1.80 in 2012.