UBS: Archegos blow shows dangers in definitional slippage
The only consolation is that the Swiss bank could have taken a bigger hit
Archegos is a Greek word denoting leadership. The place where the eponymous family office led UBS, and a growing roll call of investment banks, was into a morass. The Swiss group has revealed a surprise $774m hit to operating profits due to an Archegos “trading loss” at its prime brokerage in the first quarter, with another $87m expected this period.
UBS majors in wealth management, where risks and capital requirements are low. Its shares have been rewarded accordingly. But banking is prone to dangerous category slippage.
Archegos resembled a hedge fund more than a lightly regulated family office. UBS’s investment bank is meanwhile supposed to focus on supporting key clients of other divisions. That mission must be pretty elastic to include servicing a speculator using numerous other prime brokers, who support hedge funds with loans and derivatives deals.
New chief executive Ralph Hamers would like the profit hit to be seen as a one-off. No wonder. A concentrated client portfolio of highly levered single-stock positions eluded the oversight of UBS risk managers.
This trading loss was not so far away from the $911m loss at Morgan Stanley, which is a top-tier prime broker. UBS is not in that league. Two questions follow. Did UBS offer even more leverage to this client to win its favour? Or was it simply too late to react in selling collateral?
A review of risk ordered by Hamers should probe what went wrong. UBS claims it will require greater disclosure of investments by its clients in future. The only consolation is that UBS could have taken a bigger hit. Consider Nomura’s latest estimate of $2.9bn of worst-case losses. That is nearly 50 per cent more than initially feared.
UBS still managed a respectable return on tangible equity for the quarter of 14 per cent. Net interest income jumped more than a fifth. There was enough common equity tier one capital, at 14 per cent, to cover last year’s dividend and resume buyback of shares. Against guidance of a percentage point lower, that should leave UBS nearly $2.9bn to hand back to shareholders.
The bank won credit for speed and skill with which it shrunk its investment bank in the wake of the financial crisis. The onus is now on Hamers to prove that the unit has not exploited better conditions to stretch the boundaries of the business it is permitted to undertake.