Market Overview

Are Poor Results From UBS A Bad Omen For Europe?

Swiss banking giant UBS AG (NYSE: UBS) announced that its 4th quarter net profit fell 76% to 393 million Swiss francs ($427 million), down from 1.66 billion Swiss francs for the same quarter a year earlier. The result fell well short of the forecast of 737 million Swiss francs in a Reuters poll of analysts. The bank also warned that more trouble could be ahead.

The bank's poor results stemmed from a dismal performance by its investment banking business, which reported its second consecutive quarterly loss. UBS has been counting on its wealth management business to make up for the loss of income from its investment banking business but that might not be possible during the current economic environment. Nonetheless, the bank plans to stick with this strategy, with CEO Sergio P. Ermotti saying that "more than ever, our clients demand safety, stability and the best investment advice to steer them successfully through turbulent markets. We are uniquely positioned to deliver exactly this."

To its credit, the bank has made progress in getting risky assets off of its balance sheet. UBS said that it had reduced Basel III RWA by an estimated 20 billion Swiss francs, "with no significant impact on profitability."

However, UBS was cautious when it said that "ongoing concerns surrounding eurozone sovereign debt, the European banking system and US federal budget deficit issues, as well as continued uncertainty about the global economic outlook in general, appear likely to have a negative influence on client activity levels in the first quarter of 2012."

The bank went on to say that "such circumstances would make sustained and material improvements in prevailing market conditions unlikely and would have the potential to generate headwinds for revenue growth, net interest margins and net new money. In light of the above, traditional improvements in first quarter activity levels and trading volumes may fail to materialize fully, which would weigh on overall results for the coming quarter, most notably in the Investment Bank."

UBS has faced a number of problems over the past few years, including legal troubles in the United States and a $2.3 billion loss last year from unauthorized trades made by a rogue trader in its London office. It remains to be seen whether or not the bank can get past all of these problems while the eurozone is in the middle of a financial crisis that could push much of the world into recession.


ACTION ITEMS:

Bullish:
Traders who believe that the troubles facing UBS are mostly self inflicted might want to consider the following trades:
  • European banking giants Deutsche Bank AG (NYSE: DB) and Banco Santander (NYSE: STD) could be alternative investment options for traders who believe that Europe's banking stocks will recover from the last year's declines.
  • The CurrencyShares Euro Trust (NYSE: FXE) and the iShares MSCI Europe Financials (Nasdaq: EUFN) could also post significant gains if the market regains confidence in the European banking system.
Bearish:
Traders who believe that falling profits at UBS could be a sign of things to come at other European banks may consider alternative positions:
  • The ProShares UltraShort MSCI Europe (NYSE: EPV) and the ProShares UltraShort Euro (NYSE: EUO) are two ETFs that could benefit if falling banking profits aren't isolated to UBS.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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