UBS Sees ‘Modest’ Net Profit, Helped by Credit-Spread Gain

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October 04, 2011, 3:11 AM EDT By Elena Logutenkova

(Updates with analyst comments from fourth paragraph.)

Oct. 4 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, said it expects a “modest” net profit in the third quarter as gains from wider credit spreads and the sale of bonds helped cushion the $2.3 billion loss from unauthorized trading.

The bank expects to book a fair-value gain of about 1.5 billion Swiss francs ($1.6 billion) as its credit spreads grew in the third quarter. UBS also sees a 700 million-franc profit from the sale of U.S. Treasuries and U.K. gilts held in the wealth-management and Swiss bank division, the Zurich-based company said in an e-mailed statement today.

UBS said last month it may be unprofitable in the quarter after discovering the losses from unauthorized trading at its investment bank. Chief Executive Officer Oswald Gruebel resigned on Sept. 24, saying the trading incident has “worldwide repercussions,” and was replaced by Sergio Ermotti on an interim basis. The company is due to disclose detailed third- quarter earnings on Oct. 25.

“The news of third-quarter profit is not as positive as it may appear at first glance because the gains UBS booked have nothing to do with normal business,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “It’s rather disappointing.”

The bank’s capital position is “strong,” as its tier 1 ratio is expected to “decline slightly” in the third quarter from 18.1 percent in the second quarter, it said. Tax expenses will be close to zero in the quarter, it added.

Net New Money

UBS also said it will have “similar” net new money inflows at its wealth-management businesses in the third quarter compared with the second quarter, and “moderate” outflows from asset management.

“Net new money inflows in the second quarter weren’t particularly strong, and if clients were to show a reaction to the trading loss, that would happen in the fourth quarter,” Becker said.

The bank will also book about 400 million francs in reorganization charges after announcing in August plans to eliminate about 3,500 jobs, with about 45 percent of the reductions coming from the investment bank, as stricter capital requirements and market turmoil hurt the earnings outlook. The bank in July scrapped the target of doubling pretax profit from last year’s level to 15 billion francs by 2014.

‘Growth Regions’

The cost-reduction program, aimed to save the company 2 billion francs annually by the end of 2013, is “on track,” UBS said today. The bank will continue to invest in “growth regions,” including Asia Pacific, the Americas, emerging markets and the global wealth management franchise, it added.

The trading loss, which resulted from positions in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, may accelerate the plans to shrink UBS’s investment bank, analysts have said. The unit will probably be unprofitable for 2011 and drag down returns on equity for the group in the coming years, Morgan Stanley analysts Huw van Steenis and Hubert Lam estimated in a note yesterday.

Kweku Adoboli, 31, the UBS trader charged with fraud and false accounting that may have resulted in the loss, remains in custody in London. He has yet to enter a plea.

--Editors: Keith Campbell, Edward Evans.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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