ZURICH (BLOOMBERG) - UBS Group posted an unexpected US$774 million (S$1.03 billion) hit from the collapse of Archegos Capital Management, joining United States rival Morgan Stanley in surprising investors over the extent of the impact from the US hedge fund's implosion.

The hit helped drive a US$554 million decrease in revenue at the Zurich-based bank's global markets business, overshadowing what would otherwise have been higher revenue on increased equity derivatives and cash equities, according to a statement from the bank on Tuesday (April 27). Overall, the bank reported better-than-expected profit of US$1.82 billion, even as Archegos reduced net income by US$434 million.

Switzerland's second-largest bank had remained quiet mum on the collapse of Mr Bill Hwang's family office for weeks as rival Credit Suisse Group unveiled some US$5.5 billion in losses tied to Archegos. Nomura Holdings also warned of potentially steep losses, while Goldman Sachs Group, JPMorgan Chase & Co and Wells Fargo all managed to limit or avoid losses. Morgan Stanley was criticised by some investors and analysts for revealing a US$911 million hit at the time of its earnings.

UBS fell as much as 4 per cent in early Zurich trading on Tuesday, leading European bank stocks lower.

The "Archegos losses have taken the shine of these results," JPMorgan analysts Kian Abouhossein and Amit Ranjan wrote in a note.

The turmoil at Credit Suisse had afforded UBS chief executive officer Ralph Hamers a period of relative calm, even as the bank fights a US$4.5 billion penalty in France and the new CEO himself saw his short tenure complicated by a Dutch probe into his role in a money-laundering case at his former employer ING Groep. Mr Hamers said UBS expects an additional US$87 million trading loss in the second quarter from exiting its remaining Archegos exposure in April.

"We are all clearly disappointed and are taking this very seriously," the CEO said. "A detailed review of our relevant risk management processes is underway and appropriate measures are being put in place to avoid such situations in the future."

Mr Hamers, speaking in a Bloomberg Television interview, said that the bank would be seeking more transparency from family offices and other big clients at the wealth management division, though there are no plans to cut back the prime brokerage business as Credit Suisse plans to do. Some lenders were blindsided by the positions that Hwang had accumulated before the meltdown.

The Archegos impact also overshadowed a strong quarter at the bank's key wealth management business, where UBS benefited from higher average fee-generating assets and transaction fees, compensating for a decline in net interest income. The unit, led by Iqbal Khan and Tom Naratil, posted better-than-expected pretax profit of US$1.41 billion, , the bank said in a statement on Tuesday. It gave a mixed outlook for the second quarter, warning of lower seasonal activity while saying higher asset prices should have a positive effect on recurring fee income.

Momentum continued with US$36 billion in net inflows comprised of fee-generating assets. UBS has decided to no longer report the broader metric of net new money, which includes idle deposits and custody assets. The bank issued US$11 billion in net new loans in the first quarter, following a year of US$26 billion in issuance leading the bank to meet its target early.

Trading Impact

At the investment bank, the Archegos hit drove down equities revenue by 20%, though it would have gained 48% excluding the hit. Fixed income trading declined about 37%.

Mr Hamers, six months into the job, is taking a deep look at where he can cut costs and digitalize operations, including in the high-touch business of serving the world's wealthiest people. He wants to use artificial intelligence to target how to sell more products to the world's wealthy and rethink what markets the bank operates in, with a heavy focus on Asia.

The implementation of new initiatives are expected to provide US$1 billion in gross saving per year by 2023. The bank will also take a restructuring charge of US$300 million in the second quarter related to their implementation.

As part of his digital plans, Mr Hamers replaced the chief operating officer position with that of chief digital and information officer. UBS named Mike Dargan to that role, joining the group executive board on May 1, according to a separate statement. He has been head of group technology at the Zurich-based bank since joining in 2016.