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UBS hit by costs of bad old debt ahead of Credit Suisse ‘tough’ mission

UBS hit by costs of bad old debt ahead of Credit Suisse ‘tough’ mission
  • The debt problem dates back 15 years to the financial crash
  • UBS expects to close the C-Swiss deal by the second quarter of May
  • The CEO warns of the difficult task of integrating Credit Suisse

ZURICH (Reuters) – UBS Bank (UBSG.S) said on Tuesday it has set aside more money to force an end to its involvement in toxic US mortgages, halving its first-quarter profit as the bank prepares for a “tough” self. Mission to swallow up competitor Credit Suisse (CSGN.S).

Sergio Ermotti, who is back as UBS chief executive to direct the acquisition, said he aims to close the deal with Zurich-based Credit Suisse by May, but cautioned that a full merger could take four years.

“There is a lot to be done and there will be difficult decisions that will be taken in the coming months,” he said during a call with analysts.

Meanwhile, the daunting task of absorbing Credit Suisse includes dealing with a backlash against the deal at home, where thousands of job cuts are feared.

Shares of UBS fell 1.46% at 0956 GMT on news that Switzerland’s largest bank was trying to weather problems dating back 15 years to the global financial crisis.

UBS said concerns about the banking sector globally persisted and customer activity “may remain subdued in the second quarter,” adding, however, that higher interest rates would boost lending income.

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

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The net profit of $1 billion was well below the consensus average of $1.7 billion from a UBS survey.

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

The leading wealth management division received $28 billion in net new funds, a quarter of which came in the last 10 days of March after the Credit Suisse bailout.

UBS reported a slight decline in year-over-year earnings before tax and revenue for the division, saying there was an increase in deposit revenue stemming from higher interest rates but at the same time some customers shifted to lower-margin products.

Old toxic debt

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

In November 2018, US authorities initiated legal proceedings against UBS, seeking sanctions for its involvement in dozens of such transactions. After that UBS lost a lawsuit 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 inheritance issue,” Ermotti said.

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

UBS said it expects to close the Credit Suisse acquisition in the second quarter, possibly in May. Ermoti said more clarity about which companies UBS intends to keep will emerge in the coming months.

Credit Suisse has a presence in more than 50 countries and UBS said some of its former rival’s markets, such as Latin America, “bring value”.

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UBS is still awaiting formal approval from European antitrust regulators after getting an initial go-ahead earlier this month. The European Central Bank is also expected to sign on to the deal, Ermoti said, after its counterparts in the United States, Britain and Switzerland gave their approval in April.

Scandal-scarred Credit Suisse has knelt after customers left in droves amid turmoil in the global banking sector. Under a deal hastily engineered by the Swiss authorities, UBS agreed to take over it for CHF3 billion and assume up to CHF5 billion in losses.

UBS said it has not yet decided whether to keep local credit Suisse, which earlier this month said in a Zurich-based Inside Paradeplatz financial blog that UBS was considering a possible IPO.

“I personally believe that there is no real problem with regard to the existence of censorship in Switzerland,” said Ermotti.

“What we need to do is make those decisions on the basis of facts, not emotions. Right now the discussion is based entirely on emotions, and in many cases fully united,” he added.

Credit Suisse said on Monday that 61 billion francs ($68 billion) of assets left the bank in the first quarter and that outflows were continuing, highlighting the challenge facing UBS.

“We need time,” Ermotti said in an online video, adding, “It’s going to be tough.”

(Reporting by Noel Ellen) Editing by Edwina Gibbs

Our standards: Thomson Reuters Trust Principles.

Stefania Spizzati

Thomson Reuters

Stefania is an award-winning correspondent covering European investment banking for Reuters. Based in London, she chronicles all things finance, breaking news and delving into the world’s largest banks. Born in Puglia, Italy, Stefania started out as a financial journalist in Milan for MF-DowJones, a news agency backed by Dow Jones and Milano Finanza, one of Italy’s leading financial publications. Before joining Reuters, Stefania spent about a decade at Bloomberg News, starting in Milan and then moving to London. She helped lead an investigation that exposed how millions of pounds of taxpayer-backed loans went to companies with questionable credentials using data journalism. The story won the British Press Awards in crime journalism. Contact: +44 7500 684790

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