UBS, Nomura push global banks’ Archegos losses to over $ 10 billion

UBS (UBSG.S) on Tuesday announced an unexpected loss of $ 774 million following the collapse of the American investment fund Archegos, dealing the total blow to the global banks of the stricken family office to over $ 10 billion.

The charge by Switzerland’s largest bank comes as the fallout from Archegos continues to trickle down to the banking sector, with Nomura (8604.T) recording its biggest quarterly loss in more than a decade on Tuesday due to its relations with the troubled fund. The Japanese bank said it would record losses of around $ 2.9 billion this year on Archegos. Read more

Morgan Stanley lost nearly $ 1 billion following the implosion of the family office, while UBS rival Credit Suisse took the hardest hit with a charge of more than $ 5 billion after the Archegos’ default on margin calls at the end of March, triggering an inflammatory sale of shares.

UBS, the world’s largest wealth manager, said it was reviewing all of its client relationships both within its prime brokerage unit, which caters to hedge funds, and within of its family office activity, which manages very large pools of money for high net worth individuals and families. . It is also reviewing its risk management systems.

“I understand that you are disappointed. We are also disappointed,” Ralph Hamers, managing director of UBS, told analysts on a call about the loss, the magnitude of which had surprised investors.

UBS shares fell 3.0% in morning trading.

“(The loss of Archegos) highlights the risk inherent in its activities in the capital markets and presents a step back from its risk aversion (UBS) culture,” said Moody’s analyst Michael Rohr in a note. “The bank’s strong capital and liquidity remain key credit assets that protect its financial profile and ratings.”

UBS, which previously declined to comment on the fallout from Archegos, said on Tuesday that income earmarked for its prime brokerage business reduced net income by $ 434 million in the first quarter.

Still, net income of $ 1.82 billion for the first three months of 2021 topped the median forecast of $ 1.59 billion from 20 analysts polled by the bank in the middle of a bumper quarter for debt and debt. stock trading.

Hamers, who took over from longtime boss Sergio Ermotti in November, was hired to help boost the bank’s digitization efforts after a successful stint at ING (INGA.AS).

But his UBS debut, widely hailed as an opportunity to prepare the bank for a more tech-driven future, was complicated by a Dutch criminal investigation into his role in money laundering failures at ING. Read more

Hamers announced several strategic initiatives on Tuesday when speaking with analysts, aimed at making UBS a faster, more customer-centric “digital native” company focused on sustainable investing.

Simplifying its setup and further digitization efforts are expected to generate roughly $ 1 billion in gross savings per year by 2023, the bank said.

UBS has been in the financial news in recent months, after a series of painful missteps at its closest rival, Credit Suisse (CSGN.S), resulted in losses, layoffs and polls from the second Swiss bank. Read more

Hamers said on Tuesday that the bank had not felt the need to disclose the loss of Archegos due to strong first quarter results earlier and that it had no plans to abandon its prime brokerage business. after the debacle.

He left all remaining positions in April, resulting in an additional loss of $ 87 million in the second quarter, Hamers said.

Taking a cautious approach to the second quarter, the bank said it expects customer activity levels to drop from highs seen in the first three months of the year, partially offset by an increase in the recurring costs that it generates on the management of clients’ investments due to the rise in asset prices.

RECORD CUSTOMER ACTIVITY

UBS derives most of its profits from advising and managing money for the world’s wealthy, while maintaining small global investment banking and asset management operations.

It only conducts retail and corporate banking in its home market.

This business model has borne fruit in 2020, as its portfolio of low-risk loans – consisting mostly of mortgages and loans to the rich, as well as a smaller portion of business and personal loans in its domestic market. prosperous Switzerland – suffered fewer losses than many street peers. Read more

Now, in the first three months of 2021, the bank has again exceeded its financial targets due to record activity in its client franchises.

U.S. banks posted better-than-expected results for the first quarter, with Goldman Sachs (GS.N) up six-fold profits and Morgan Stanley (MS.N) boosting profits by 150% despite disclosure of close loss billion dollars on Archegos.

UBS, however, saw the investment bank’s pre-tax profit fall by 42% due to the Archegos charge and more modest revenue growth in the rest of its trading activities.

Wealth management saw profits rise 16% as loan growth and high transaction levels helped cushion the impact of falling and persistently low interest rates.

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