UBS Q1 profit up 14% as Switzerland's top bank unveils $774 mn Archegos hit

UBS posted on Tuesday a 14% rise in first-quarter net profit on record high client activity levels, but the world's largest wealth manager lost some of its shine as it unveiled it lost $774 million dealing with US investment firm Archegos.

Net profit of $1.824 billion for the first three months of 2021 overshot median expectations for $1.591 billion in a poll of 20 analysts compiled by the bank.

The bank posted a better than expected first-quarter pre-tax profit, as increases over the frenzied trading and bumper results achieved during the start of the coronavirus crisis last year helped offset the hit from Archegos.

"We are all clearly disappointed and are taking this very seriously," Chief Executive Ralph Hamers said of the loss in its prime brokerage business related to the US client's default. "A detailed review of our relevant risk management processes is underway and appropriate measures are being put in place to avoid such situations in the future."

Hamers, who took over from long-time boss Sergio Ermotti in November, was hired to help boost the bank's digitalisation efforts after a successful stint doing so at ING.

But his start at UBS, widely lauded as an opportunity to prime the bank for a more tech-centred future, has been complicated by a Dutch criminal investigation into his role in money laundering failings at ING.

Hamers said on Tuesday he plans to unveil new strategic initiatives.

UBS has taken a back seat in financial headlines over recent months, after a slew of painful missteps at its nearest rival Credit Suisse prompted losses, sackings and probes at Switzerland's No. 2 bank.

Credit Suisse has suffered a more than $5 billion hit from the Archegos debacle, which triggered losses amongst a swathe of global banks and a fire sale of stocks when it defaulted on margin calls in late March.

UBS, which has hitherto received little scrutiny over its involvement in Archegos and had previously declined comment on any related positions, said on Tuesday the revenue hit to its prime brokerage business had reduced net profit by $434 million in the first quarter.

It had exited all remaining positions in April, it said, and would recognise related losses in the second quarter which are "immaterial for the group".

UBS derives the biggest chunk of its profits from advising and managing money for the world's rich, while also maintaining smaller global investment banking and asset management operations.

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

That business model paid off in 2020, as its low-risk lending book - comprised primarily of mortgages and loans to the wealthy, as well as a smaller portion of corporate and retail credits in its prosperous Swiss home market - suffered fewer losses than many high street peers.

Now, in the first three months of 2021, the bank once again overshot financial targets on the back of record activity across its client franchises and as a smaller and more risk-averse investment bank helped cushion the blow from Archegos but also reaped fewer rewards off stellar capital markets activity posted by peers.

US banks posted forecast-beating results for the first quarter, with Goldman Sachs boosting profits six-fold and Morgan Stanley raising profits 150% despite disclosing a nearly $1 billion loss on Archegos.

UBS, however, saw investment banking pre-tax profit fall 42% on the back of the charge related to Archegos and more modest revenue growth in the rest of its trading business.

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

The bank saw $36.2 billion in fresh client inflows from wealthy customers, helping invested assets increase to $3.108 trillion.

Its asset management unit, meanwhile, posted the biggest gains across any of the bank's divisions, increasing earnings 45% thanks to the strong investment environment.