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UBS hit by old toxic debt costs ahead of 'hard' Credit Suisse task

Published 04/25/2023, 12:52 AM
Updated 04/25/2023, 08:01 AM
© Reuters. FILE PHOTO: A logo of Swiss bank UBS is seen in Zurich, Switzerland March 29, 2023. REUTERS/Denis Balibouse

By Noele Illien and Stefania Spezzati

ZURICH (Reuters) - UBS said on Tuesday it had set aside more money to draw a line under its involvement in toxic U.S. mortgages, halving its first-quarter profit as the bank girds itself for the "hard" task of swallowing fallen rival Credit Suisse.

Sergio Ermotti, brought back as UBS chief executive to steer the takeover, said it aims to close the deal with fellow Zurich-based bank Credit Suisse by May but warned that it could take four years for a full integration.

"There is much to do and there will difficult decisions to be made in the coming months," he said during a call with analysts.

Meanwhile, the Herculean task of absorbing Credit Suisse includes dealing with a backlash against the deal at home, where thousands of jobs cuts are feared.

Shares in UBS were down 1.46% at 0956 GMT following news of the attempt by Switzerland's biggest bank to make a clean sweep of problems dating back 15 years to the global financial crisis.

UBS said concerns about the banking sector globally persisted and customer activity "could remain subdued in the second quarter", adding, however, that higher interest rates would bolster its lending income.

It reported a 52% slide in quarterly income, having made an additional $665 million in provisions to cover litigation costs related to U.S. residential mortgage-backed securities that played a central role in the global financial crisis.

Net profit of $1 billion was well below the $1.7 billion consensus average from a UBS-conducted poll.

But the world's largest wealth manager also reported strong inflows, totalling some $42 billion.

Its flagship wealth management division received $28 billion in net new money, a quarter of which came in the last ten days of March after the Credit Suisse rescue takeover deal.

UBS reported a slight drop in year-on-year profit before tax and revenue for the division, saying there had been an increase in deposit revenues stemming from higher interest rates but at the same time some clients had shifted to lower-margin products.

OLD TOXIC DEBT

UBS was an issuer and underwriter of U.S. residential mortgage-backed securities in the five years to 2007, according to its annual report last year.

In November 2018, U.S. authorities commenced legal action against UBS, seeking penalties for its involvement in scores of such deals. UBS subsequently lost a court case on the matter.

"We are in advanced discussions with the US Department of Justice, and I am pleased that we are making progress toward resolving the legacy matter," Ermotti said.

Investment bank revenue fell 19% year-on-year, in line with forecasts, and profit before tax for the division slumped 49%. 

UBS said it expects the takeover of Credit Suisse to close in the second-quarter, possibly in May. More clarity around which businesses UBS intends to keep will emerge in the next months, Ermotti said.

Credit Suisse has a presence in more than 50 countries and UBS said that certain markets where its former rival is active like Latin America "brings value".

UBS is still waiting for formal approval from European antitrust regulators after getting an initial green light earlier this month. The European Central Bank is also expected to sign off on the deal after its U.S., British and Swiss counterparts gave their approval in April, Ermotti said.

Scandal-scarred Credit Suisse was brought to its knees after clients left in droves amid global banking sector turmoil. Under a deal hastily engineered by Swiss authorities, UBS agreed to take it over for 3 billion Swiss francs and to assume up to 5 billion francs in losses.

UBS said it has not decided whether it will keep the Credit Suisse domestic business, which earlier this month Zurich-based finance blog Inside Paradeplatz said UBS was exploring a possible IPO for.

"I personally and we believe there is no real issue in terms of oversight presence in Switzerland," Ermotti said.

"What we need to do is also to make those decisions based on facts and not emotions. Right now the discussion is totally based on emotions, in many cases totally uninformed," he added.

Credit Suisse said on Monday that 61 billion francs ($68 billion) in assets had left the bank in the first quarter and that outflows were ongoing, highlighting the challenge for UBS.

© Reuters. FILE PHOTO: A logo of Swiss bank UBS is seen in Zurich, Switzerland March 29, 2023. REUTERS/Denis Balibouse

"We need time," Ermotti said in an online video, adding: "Things are going to be hard".

(This story has been refiled to correct the spelling of the word 'uninformed' in paragraph 22)

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