UBS Reports Pre-Announced Loss

As pre-announced, UBS AG (UBS: 14.33 0.00 0.00%) reported a net loss from continuing operations attributable to UBS shareholders of CHF1.98 billion, driven by trading losses of CHF630 million at the Investment Bank as it continues to shed risky assets. This compares to a loss of CHF11.69 billion in last year’s first quarter, hurt by exceptionally large trading losses of CHF11.63 billion.

Net fee and commission income also experienced declines due to weaker capital markets: brokerage fees fell 27%, investment fund fees were off 36%, and portfolio management and advisory fees slumped 31%. This performance also reflected net new money outflows of CHF23.4 billion at Wealth Management & Swiss Bank and CHF7.7 billion at Global Asset Management. Positively, Wealth Management Americas had net new money inflows of CHF16.2 billion.

Operating expenses dropped 17% year over year to CHF6.53 billion, largely reflecting a 27% decrease in administrative expenses and a 25% decline in compensation costs as the company continues to cut costs. UBS intends to shave CHF3.5-4.0 billion in costs by 2010, including staff reductions of 10,000 people, or about 13% of the work force at the end of 2008.

Credit quality deteriorated during the quarter, and UBS posted a 265% increase in the credit loss provision to CHF1.14 billion from CHF311 million a year ago, principally due to losses related to illiquid loan syndications. Impaired loans increased CHF1.03 billion, or 20%, sequentially to CHF6.25 billion. As a percentage of total loans, impaired loans increased to 3.3% at March 31, 2009 from 2.2% at December 31, 2008.

The company continues to exit higher risk or low-critical-mass businesses and shrunk its balance sheet by CHF153 billion and its risk-weighted assets by CHF25 billion during the quarter. In fact, UBS is selling UBS Pactual, its Brazilian financial services business, for US$667 million, expected to close by mid-2009. This sale will help capital adequacy as the Tier 1 capital ratio increases 50 basis points from the 10.5% actually reported at March 31, 2009 to 11.0% pro forma, flat with December 31, 2008.

We currently have a Hold on UBS and note that the Zacks rank is 3, indicating no clear near-term directional pressure on the share price.