UBS profits cut in half as old toxic debt costs rise

ZURICH, April 25 (Reuters) – UBS Group ( UBSG.S ) has set aside more money to draw a line under its involvement in toxic mortgages, halving first-quarter profits as it prepares to swallow fallen rival Credit Suisse (CSGN.S) ).

Chief executive Sergio Ermotti, back in the saddle to manage the takeover, also said “challenging” economic conditions had dampened sentiment among the bank’s customers and warned of difficulties ahead as it embarks on an integration process that could take four years.

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

UBS’s share opened down 4.6 percent.

The attempt by Switzerland’s biggest bank to clean up 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 client activity “may remain muted in the second quarter”, but added that higher interest rates would bolster lending income.

It reported a 52% drop in quarterly revenue, after making an additional $665 million in provisions to cover litigation costs related to US mortgage-backed securities that played a central role in the global financial crisis.

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

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

The flagship wealth management division received $28 billion in net new money, a quarter of which came in the last ten days of March following the announcement that it would take over Credit Suisse.

It reported a slight decline in annual profit before tax and revenue for the division. It said there had been an increase in deposit income stemming from higher interest rates, but at the same time some customers had switched to products with lower margins.

OLD TOXIC DEBT

UBS was an issuer and underwriter of US mortgage-backed securities in the five years to 2007, according to the company’s annual report last year.

In November 2018, US authorities initiated legal action against the Swiss bank, seeking penalties for its involvement in many such deals. UBS subsequently lost a court case over the matter.

“We are in advanced discussions with the U.S. Department of Justice, and I am pleased that we are making progress toward resolving the legacy case that goes back 15 years,” Ermotti said.

Investment banking revenue fell 19% year-on-year, in line with expectations, and pre-tax profit for the division fell 49%.

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 customers left in droves amid global banking sector turmoil. Under the deal quickly worked out by Swiss authorities, UBS agreed to take it over for 3 billion Swiss francs and to absorb up to 5 billion francs in losses.

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 continuing, underscoring the challenge facing UBS.

Reporting by Noele Illien; Editing by Edwina Gibbs

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