UBS hit by old toxic debt ahead of ‘tough’ Credit Suisse job

  • Problem loans predate the financial meltdown by 15 years
  • UBS expects to close the C. Suisse deal by 2Q, possibly by May
  • The CEO warned of the difficult task of integrating Credit Suisse

ZURICH, April 25 (Reuters) – UBS ( UBSG.S ) said on Tuesday it had set aside more cash to draw a line under its exposure to toxic U.S. mortgages, after the bank “halved its first-quarter profit for hard money.” Its task of swallowing up fallen rival Credit Suisse (CSGN. S).

Sergio Ermotti, brought back as UBS chief executive, said it would complete the deal with fellow Zurich-based bank Credit Suisse by May, but warned that full integration could take four years.

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

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

Shares in UBS were down 1.46% at 0956 GMT following news that Switzerland’s biggest bank is trying to clean up problems dating back 15 years to the global financial crisis.

UBS said concerns about the banking sector globally persisted and that client activity was “likely to remain modest in the second quarter”, although it said higher interest rates would boost its loan income.

It reported a 52% drop in quarterly earnings, setting aside an extra $665 million to cover litigation costs related to US residential mortgage-backed securities that played a key role in the global financial crisis.

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Net profit of $1 billion was well below the consensus average of $1.7 billion from a UBS-conducted poll.

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

Its flagship wealth management unit received $28 billion in net new money, a quarter of which came in the last ten days of March after the Credit Suisse rescue acquisition deal.

UBS reported a slight fall in year-on-year profit before tax and earnings for the division, citing an increase in deposit income from higher interest rates, but at the same time some customers switched to lower-margin products.

Old toxic debt

In the five years through 2007, UBS was the largest issuer and underwriter of U.S. residential mortgage-backed securities, according to its annual report last year.

In November 2018, US authorities initiated legal action against UBS, seeking fines for engaging in several such deals. UPS later lost the matter in court.

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

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

UBS expects the acquisition of Credit Suisse to close in the second quarter, possibly in May. Ermotti said more clarity on which businesses UBS intends to hold will emerge in the coming months.

Credit Suisse has a presence in more than 50 countries and UBS said some active markets like its former rival Latin America “bring value”.

After receiving the initial green light earlier this month, UBS is still awaiting formal approval from European antitrust regulators. The European Central Bank is also expected to sign the deal after its American, British and Swiss counterparts give their approval in April, Ermotti said.

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Scandal-hit Credit Suisse has been brought to its knees after customers fled in droves amid turmoil in the global banking industry. Under a deal hastily drawn up by Swiss authorities, UBS agreed to take it over for 3 billion Swiss francs and incur losses of up to 5 billion francs.

UBS said it had not decided whether Credit Suisse would retain the domestic business, and earlier this month Zurich-based financial blog Inside Paradeplatz reported that UBS was exploring a possible IPO.

“I personally believe that there is no real issue with having oversight in Switzerland,” Ermotti said.

“What we need to do is make those decisions based on facts and not on emotions. Now the debate is purely based on emotions, and in many cases completely balanced,” he added.

Credit Suisse said on Monday that 61 billion francs ($68 billion) of assets left the bank in the first quarter, underscoring the challenge for UBS as the exits continue.

“We need time,” Ermotti said in an online video: “Things will be difficult”.

Report by Noel Illion; Editing by Edwina Gibbs

Our Standards: Thomson Reuters Trust Principles.

Stephanie Spezzatti

Thomson Reuters

Stefania is an award-winning reporter covering the European Investment Bank at Reuters. Based in London, he covers all things finance, breaking news and digging deep into the world’s biggest banks. Born in Puglia, Italy, Stefania began working in Milan as a financial journalist for MF-DowJones, the leading Italian financial publication subsidiary of Dow Jones and Milano Finanza. Before joining Reuters, Stefania spent a decade at Bloomberg News, starting in Milan and then moving to London. He helped lead an investigation that exposed how millions of pounds in taxpayer-backed loans went to companies with dubious credentials using data-journalism. The story won the British Journalism Awards in Crime Journalism. Contact: +44 7500 684790

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