Has UBS bank finally turned the corner?

UBS CEO Grübel has something to smile about Keystone

A mere 18 months ago UBS was staring down a precipice with SFr21 billion ($19.9 billion) losses in 2008 and a United States tax evasion scandal around the corner.

On Tuesday, six weeks after settling the US tax case, the bank reported a third successive quarter of profits and a marked decline in assets being withdrawn by wealthy clients. Has UBS left all of its problems behind?

Chief executive Oswald Grübel, charged with restoring the bank’s fortunes since his appointment in February last year, sounded a bullish note during the quarterly results conference in Zurich.

“We have done a bit more than turn the corner, we did that in the fourth quarter of last year,” Grübel said. “If you compare our Q2 [second quarter, 2010] results with our peers then we are operating as normal.”

This was unsurprising considering that UBS had beaten all expectations by recording a SFr2 billion profit in the last three months – beating Credit Suisse’s SFr1.6 billion result announced last week.

“Today’s results confirm that UBS is on track to restore its reputation and turnaround the net new money into positive territory, which we foresee in [the second half of 2010],” Bank Sarasin said in a note on Tuesday.

UBS stocks soared 11.2 per cent over yesterday’s close to end the day at SFr17.46 a share.

Fourth corner unturned

A decision by the Swiss parliament to approve a deal with the US to hand over UBS client data looks to have finally ended the damaging tax evasion case that rocked the entire Swiss banking industry last year.

In fact, the tax evasion spotlight has now settled on cross-town rival Credit Suisse that had its offices in Germany raided by tax officials earlier this month.

But Hans Geiger, professor emeritus at the Swiss Banking Institute of Zurich University, believes the bank still has to overcome the hurdle of net outflows of wealthy clients before it can properly say it is back on track.

“There are actually four corners and UBS has only turned three of them,” he told swissinfo.ch. “The bank is profitable, is better capitalised against risk and has settled its legal issues, but will take a bit longer to achieve net new inflows.”

Geiger agrees with UBS that the slowing outflow of wealthy clients’ money should come to a halt by the end of the year. But the bank would then have to start attracting new assets to reach the same level as rivals – a process that could take some time.

Quality over quantity

UBS still enjoys a strong reputation in Asia where the wealthy continue to deposit their assets at the bank, albeit at a slower rate than normal. Confidence is so high in the region that UBS plans to recruit another 2,200 staff in the next three years, across most divisions, raising numbers there to 9,500.

The bank still continues to lose assets in the US, where its wealth management business is being reorganised. But the biggest outflows are being witnessed closer to home where Europeans are closing cross-border accounts held in Switzerland.

However, losses attributable to star client advisors leaving the bank and taking customers with them have bottomed out, according to the bank. Grübel stated that the emphasis would turn to improving the service for existing clients and concentrating on quality over quantity.

“Unfortunately, in the last few years people concentrated on chasing net new assets and sometimes forgot that they had to manage those assets properly,” he said.

Grübel added that hiring the best talent, although costly, remains the best way of driving up margins that have been hit by increased competition and more shopping around by clients for lower fees.

“Prices [wages] for good people are at their highest ever and there are very few good people around,” he added. “With better people you generally get more revenues and that would justify higher costs.”

Winning over the locals

Geiger believes UBS should first concentrate on winning back the hearts and minds of Swiss clients who are still withdrawing money from the bank once prided as being the best in the business.

“This is an indication that Swiss clients are still not comfortable with UBS,” he told swissinfo.ch. “The problems at UBS not only affected the minds of Swiss people, but their hearts as well. The emotional bond to UBS has to be reconnected.”

UBS has started the trust rebuilding process by renovating domestic bank branches to convey a better image.

“We want people to be aware when they walk in [to a bank branch] that UBS is the biggest bank in Switzerland – in case they have forgotten,” Grübel said in a jibe at cross town rival Credit Suisse which used to employ him.

Changing fortunes

UBS was the worst hit European bank from the subprime mortgage crisis, writing down some $50 billion between the end of 2007 and 2009.

The year 2008 proved to be the bank’s worst on record, with annual losses of SFr21 billion.

UBS admitted aiding and abetting US tax cheats the following year and was forced to pay a huge fine and break the Swiss banking secrecy code by handing over the confidential details of thousands of clients.

In 2008 and 2009, UBS lost around SFr200 billion in combined net outflows as wealthy individuals and institutions lost faith in the bank.

But the final three months of 2009 revealed some more encouraging signs as the bank posted a SFr1.2 billion Q4 profit, despite ending the year in the red – to the tune of SFr2.47 billion.

The first quarter of 2010 showed further improvement with a profit of SFr2.2 billion. The figures for the latest quarter are slightly down (just over SFr2 billion), but trading conditions for all banks have been considerably more difficult in the past three months.

In June, the Swiss parliament finally ratified a deal between Switzerland and the United States that allowed UBS to hand over confidential client data without facing prosecution in its home country.

Net outflows from its wealth management businesses have slowed considerably since the turn of the year.

Outflows from its Americas wealth management business numbered SFr7.2 billion in the first quarter and SFr2.6 billion in the past three months.

For Switzerland and the rest of the world, the brake on outflows was also significant, falling from SFr8.2 billion in Q1 to SFr5.5 billion in Q2. Many analysts agree with UBS that the drain could be halted completely by the end of 2010.