Libor scandal and weak results weigh on UBS

Swiss bank UBS attempted to fend off persistent questions over its role in the global Libor scandal as it announced a disappointing set of second quarter results in Zurich on Tuesday.

Swiss bank UBS attempted to fend off persistent questions over its role in the global Libor scandal as it announced a disappointing set of second quarter results in Zurich on Tuesday.

Chief executive Sergio Ermotti denied that his bank played a central role in the interest rate rigging affair that has already claimed the scalps of top Barclays management. He also insisted that no evidence of manipulation had been found beyond that already reported to regulators.
 
At the weekend, Reuters news agency said it had uncovered court documents showing that UBS had played a prominent role in the scandal, along with Royal Bank of Scotland and Barclays.
 
“It is crystal clear that UBS is not at the centre of anything,” Ermotti said at the bank’s results press conference. “Many other banks are involved.”
 
UBS revealed last year that it had blown the whistle on its own traders and cut deals with the United States and Swiss authorities for conditional leniency or immunity from prosecution regarding the fixing of Japanese yen, yen-euro and Swiss franc Libor rates.
 
It had also been forced to tighten up its supervisory ship in Japan by the country’s financial regulators after irregularities had been uncovered.

Reputational damage

UBS’s internal investigation has leafed through “millions” of documents, according to Ermotti, but has found no evidence that would lead it to cut more immunity deals.
 
The global banking industry is under investigation from multiple jurisdictions for the fixing of key interest rates – an underhand practice believed to have been going on since at least 2005. Another Swiss bank,  Credit Suisse is also part of the ongoing probe but has a less prominent role on Libor panels than UBS.
 
The London Interbank Offered Rate (Libor) measures the cost of borrowing between banks and is reported in a number of currencies on a daily basis to the British Bankers’ Association. The Libor is a reference point for the setting of interest rates in some countries, including Switzerland.
 
In addition, trillions of dollars of derivatives trades are dependent on Libor with huge fortunes to be won or lost on the slightest change in rates. It is alleged that traders from a number of banks acted together to rig rates in order to maximise profits.
 
UBS has effectively owned up to some of its traders taking part in this dishonest activity. Last month, British bank Barclays was the first to be punished with a £290 million (SFr445 million) fine, forcing the resignations of chief executive Bob Diamond and chairman Marcus Agius.

Further punishment

The race is now on to weed out further culprits as the global banking industry takes another huge blow to its reputation.
 
Many of the accused traders have now left the banks at which they are alleged to have rigged Libor rates. Several media outlets have reported that some have turned up at Swiss hedge funds.
 
The act of owning up to the regulators may also backfire on UBS and other banks, according to some legal estimates, as it could leave them more exposed to civil actions from traders that found themselves on the wrong side of rigged deals.
 
The European Union has been leading calls for criminal prosecutions of crooked traders and the banks that supervised them. A British government-commissioned review of Libor is open to replacing the system that currently relies on the honest reporting of banks.

Results disappoint

UBS shares were also battered by a weak set of results presented on Tuesday. The bank fell way short of analysts’ expectations with a SFr698 million ($713 million) quarterly profit – down from SFr1.2 billion in the corresponding period last year.
 
Investment banking recorded a SFr130 million net loss, partially inflicted by the botched stock market flotation of Facebook. UBS blamed the US Nasdaq exchange for the bank’s SFr349 million hit on the deal and intends to take legal action to recover its losses.
 
Ermotti bemoaned the weak group results as a “mixed bag”, blaming current market conditions for some of the bank’s failings, but highlighted an inflow of SFr9.5 billion in wealth management net new assets and a further SFr3.7 billion in the US.
 
“Clients recognise [UBS’s strong capital position] and continue to entrust us with their assets,” he said in a statement. “We will continue to focus on prudent liquidity management, further reducing risk-weighted assets and delivering the best possible service to our clients.”

Group net profit: SFr698 million (SFr1.28 billion in the corresponding quarter 2011 and SFr828 million Q1 2012).
 
Investment banking recorded a SFr130 million loss (compared with a SFr730 million profit in Q1 2012). Some SFr349 million of the losses were attributed to the botched Facebook flotation.
 
Group operating income: SFr6.4 billion (SFr7.2 billion).
 
Personnel/expenses: 63,520 (-723 since Q1 2102)/SFr3.6 billion (SFr3.64 Q1 2012, SFr3.9 billion Q2 2011).
 
Basel III risk weighted assets reduced by SFr45 billion in Q2 to SFr305 billion.
 
Basel III tier 1 ratio (fully applied): 8.8% (7.5% Q1 2012).
 
Net new money Wealth Management: SFr9.5 billion (SFr6.7 billion Q1 2012).
 
Net new money Wealth Management Americas: SFr3.7 billion (SFr4.2 billion Q1 2012).

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