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Six things to watch when UBS reports fourth quarter results next week

Next Tuesday, UBS will report its fourth quarter results for 2012. We already know that they won’t be good: when the bank’s $1.5bn in Libor fines were revealed in December, UBS said it would make a loss of between CHF2-CHF2.5bn in the fourth quarter.

Nevertheless, banking analysts said there is much that remains unclear. “We’ve already had the profit warning, so next week will be all about the detail,” said Andrew Stimpson, a banking analyst at KBW. “There are a number of things they need to improve on,” he added.

If you work at UBS, or are thinking of working at UBS, this is what you need to watch for on Tuesday.

1. How well is the debt capital markets (DCM) business holding up?

Ever since UBS announced its restructuring last October, questions have been raised over the viability of its plans. Particular skepticism has been reserved for UBS’s intention to significantly pull back from fixed income trading in secondary markets and yet to maintain its primary debt capital markets business. In early January analysts at Deutsche Bank described UBS’s strategy as ‘incomprehensible and unworkable’  – the theory being that clients who want to raise money in primary markets will prefer to deal with banks that have a big secondary market presence and therefore better visibility on the likely success of their offering.

Deutsche Bank analysts predicted that UBS will be forced to close its DCM business, making thousands more redundancies before the end of 2013. Deutsche Dirk Becker, an analyst at Kepler Capital markets has predicted that UBS’s DCM business will be marginalized quarter-by-quarter.

Any slippage in debt capital markets revenues at UBS in the fourth quarter will therefore be taken as a sign that the business is becoming unviable. Early indications are that UBS’s DCM business isn’t doing well in 2013. Figures from data provider Dealogic reveal that the bank has slipped from 8th to 15th in the ranking of global DCM book runners for year-to-date 2013 versus the same period of 2012. In EMEA, the value of DCM deals UBS has worked on so far in 2013 is $5.6bn, down from $16bn in 2012, despite EMEA deal value falling only 18% over the same period.

2. How many job cuts has UBS made so far?

UBS plans to make 10,000 job cuts – mostly in its investment bank and particularly in its fixed income business, before 2015. Some of these have already happened. Some UBS bankers have already found new jobs elsewhere. Thousands of cuts are, however, likely to be yet to come.

3. Have UBS’s Libor fines wiped out the bonus pool?

When UBS announced its results for the third quarter of 2012, it explicitly stated that it had accrued CHF1.5bn in new bonuses over the first three quarters of the year (excluding the amount to cover bonuses deferred from previous years).

Then came the enormous Libor fine.

While banks like RBS and Barclays are expected to cut their bonus pools to help cover their Libor fines, there has been no indication that this will happen at UBS.

If UBS makes a full year loss in any area of its business, its remuneration plan says that it will claw back bonuses awarded in previous years. UBS made a loss in its investment bank in the first three quarters of 2012, so clawbacks seem inevitable.  

4. How well is the private bank performing?

Jon Peace, equities analyst at Nomura, said the big issue for UBS will be the performance of the private bank. “We need to see some signs of life from retail clients – are they trading more often and putting their money to work again,” said Peace.

Stimpson said the key thing for UBS’s wealth management business will be the gross margin: “This is the most important thing in wealth management. I’m looking for it to improve,” he said.

5. Is UBS sustaining its market share in the equities business?

UBS’s equities business has traditionally been one of its strong points. However, its market share was only 5.6% and falling in 2012 according to analysts at Bernstein.

As UBS scales back its investment banking ambitions, Stimpson said UBS’s equities has the potential to suffer in the same way as its DCM business. “If you let fixed income go, can you sustain an equities sales and trading business? I’ll be interested to see whether there has been attrition in equities revenues,” he said.

Stimpson said it will be almost impossible to decipher what’s happening in UBS’s fixed income sales and trading business based upon its results for the fourth quarter. “UBS has said that it won’t break out results for the businesses its exiting in fixed income until it reports for the first quarter of 2013. Fourth quarter results will have exit businesses mixed up with core business lines,” he said.

6. What’s happening to capital?

UBS is aiming to reduce its Basel risk weighted assets to CHF200bn by the end of 2017 and to improve its Basel III equity tier one ratio to 13% by 2014. If the bank is ahead of schedule, it will be good for the share price, said Peace.

“Deutsche printed a much better number than expected for capital,” he added. “As a result, the shares rallied quite hard. If UBS manages to scrub off risk weighted assets more quickly than anticipated and to print a better capital number, I think the market would take it quite well.”

A rising share price could be good news for all the UBS bankers whose bonuses are paid in the bank’s own stock.

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