UBS Q1 profit halves as cost of old toxic debt mounts

ZURICH - UBS Group has set aside more money to draw a line under its involvement in toxic mortgages, halving its first-quarter profit as it prepares to swallow fallen rival Credit Suisse.

Chief executive Sergio Ermotti,

back in the saddle to steer the takeover,

also said “challenging” economic conditions had dampened the mood of the bank’s customers, and warned of the difficulties ahead as it embarks on an integration process that may take four years.

“We need time,” he said in an online video. “Things are going to be hard.”

UBS’ stock opened down 4.6 per cent on Tuesday.

The attempt by Switzerland’s biggest bank to make a clean sweep of problems dating back to the global financial crisis underscores its vulnerability as it takes on the Herculean task of

absorbing Credit Suisse

– one whose long list of challenges includes dealing with a backlash against the deal at home.

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 lending income.

It reported a 52 per cent slide in quarterly income, having made an additional US$665 million (S$888 million) in provisions to cover litigation costs related to US residential mortgage-backed securities that played a central role in the global financial crisis.

Net profit attributable to shareholders came in at US$1 billion, below the US$1.7 billion consensus average from a UBS-conducted poll.

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

Its flagship wealth management division received US$28 billion in net new money, a quarter of which came in the last 10 days of March after the announcement that it would be taking over Credit Suisse.

Old toxic debt

UBS was an issuer and underwriter of US residential mortgage-backed securities in the five years to 2007. In November 2018, US authorities commenced legal action against the Swiss bank, 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 which dates back 15 years,” Mr Ermotti said.

Investment bank revenue fell 19 per cent year on year, in line with expectations, and profit before tax for the division slumped 49 per cent.

UBS said it expects the takeover of Credit Suisse to close in the second quarter.

Scandal-plagued Credit Suisse was brought to its knees after clients left in droves amid global banking sector turmoil. Under the deal hastily engineered by Swiss authorities, UBS agreed to take it over for three billion Swiss francs (S$4.5 billion) and to assume up to five billion francs in losses.

Credit Suisse said on Monday that 61 billion francs in assets had left the bank in the first quarter and that outflows were continuing, highlighting the challenge faced by UBS. REUTERS