UBS (UBSG: SW) takes $ 774 million surprise hit with Archegos Meltdown

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UBS Group AG revealed a hit of $ 861 million following the implosion of Archegos Capital Management and pledged to improve risk management, joining Morgan Stanley in blinding investors who had been kept in the dark for weeks about the scale of the losses.

The loss, mostly recorded in the first quarter, eclipsed better-than-expected earnings, with strong performance in the core wealth management business. CEO Ralph Hamers said that while the bank will demand more transparency from customers to avoid such losses in the future, he has defended the business with hedge funds as being “strategic” and said he did not intend to follow his rival. Credit Suisse Group AG to reduce loans.

“Obviously, we are very disappointed with this situation,” he said in an interview with Bloomberg TV. “We are looking at the different prime brokerage relationships, as well as the GFO – the family office relationships.”

Switzerland’s largest bank has been silent on the collapse of Bill Hwang’s family office for weeks, even as Credit Suisse unveiled a $ 5.5 billion blow and Japan’s Nomura Holdings Inc. also warned of large losses. While Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo have all been successful in limiting or avoiding the damage, Morgan Stanley has been criticized by some investors and analysts for revealing a loss of $ 911 million just during its results this month.

Nomura Take $ 2.3 billion Hit on Archegos, Leave most positions

UBS fell 4% in Zurich, pushing shares of European banks down as investors digested the impact of Archegos, which the bank deemed insufficient to disclose earlier.

“Archegos’ losses took the shine off these results,” wrote JPMorgan analysts Kian Abouhossein and Amit Ranjan in a note.

The turmoil over the city’s rival Credit Suisse had given Hamers a period of relative calm, even as the bank battled a $ 4.5 billion penalty in France and the new CEO himself saw his short mandate complicated by a Dutch investigation into his role in a money laundering case at his former employer ING Groep NV.

UBS recorded a hit of $ 774 million from Archegos in the first quarter, which lowered stock turnover by 20%. This figure would have increased by 48% excluding Archegos. Fixed income transactions declined by about 37%. Hamers said he expects an additional trading loss of $ 87 million in the second quarter by exiting the bank’s remaining exposure in April.

The losses overshadowed a strong quarter in the bank’s core wealth management business, where UBS benefited from higher average commission and transaction fee-generating assets, offsetting lower net interest income. The unit, headed by Iqbal Khan and Tom Naratil, posted a better-than-expected profit before tax of $ 1.41 billion, the bank said in a statement. statement Tuesday. He gave a mixed outlook for the second quarter, warning of a decline in seasonal activity while saying rising asset prices should have a positive effect on recurring commission income.

Momentum continued with $ 36 billion in new net assets generating commissions. UBS has decided to no longer report the broader net new money metric, which includes unused deposits and holdings on deposit. The bank issued $ 11 billion in new net loans in the first quarter, after a year of issuance of $ 26 billion that led the bank to quickly hit its target.

Highlights of UBS’s first quarter results:

  • Net income of $ 1.82 billion vs. estimate of $ 1.63 billion
  • Wealth management pre-tax profit of $ 1.4 billion vs Estimate of $ 1.19 billion
  • Pre-tax income from asset management of $ 227 million

Hamers, six months into his tenure, is taking an in-depth look at areas where he can cut costs and digitize operations, including in the highly tactile sector of serving the world’s richest people. He wants to use artificial intelligence to target how to sell more products to the richest in the world and rethink the markets in which the bank operates, with a strong focus on Asia.

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

As part of its digital plans, Hamers replaced the position of COO with that of Chief Digital and Information Officer. UBS has appointed Mike Dargan to the post, joining the group’s board of directors on May 1, according to a separate statement. Since his arrival in 2016, he has been responsible for group technology at the Zurich bank.

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