UBS Group disclosed an $861 million hit from the implosion of Archegos Capital Management and vowed to improve risk management, joining Morgan Stanley in blindsiding investors who'd been kept in the dark for weeks about the size of the losses.
The loss, mostly booked in the first quarter, overshadowed a better-than-expected profit, with strong performance in the key wealth management business. Chief Executive Officer Ralph Hamers said though the bank will require more transparency from clients to prevent such losses in the future, he defended its business with hedge funds as "strategic" and said he had no plans to follow rival Credit Suisse Group in cutting back lending.
"Clearly, we are very disappointed at this situation," he said in an interview. "We are reviewing the different prime brokerage relationships, as well as the GFO — the family office relationships."
Switzerland's largest bank had remained quiet on the collapse of Bill Hwang's family office for weeks, even as Credit Suisse unveiled a $5.5 billion hit and Japan's Nomura Holdings also warned of steep losses. Though Goldman Sachs Group, J.P. Morgan Chase and Wells Fargo all managed to limit or avoid damage, Morgan Stanley was criticized by some investors and analysts for revealing a $911 million loss only during its earnings this month.
UBS fell as much as 4% in Zurich trading, leading European bank stocks lower, as investors digested the Archegos impact, which the bank had considered not material enough to disclose earlier.
The "Archegos losses have taken the shine of these results," J.P. Morgan analysts Kian Abouhossein and Amit Ranjan wrote in a note.
The turmoil at cross-town rival Credit Suisse had afforded Mr. Hamers a period of relative calm, even as the bank fights a $4.5 billion penalty in France and the new CEO himself saw his short tenure complicated by a Dutch probe into his role in a money-laundering case at his former employer ING Groep.
UBS booked a $774 million hit from Archegos in the first quarter, driving down revenue from equities trading by 20%. That figure would have been up 48% excluding Archegos. Fixed income trading declined about 37%. Mr. Hamers said he expects an additional $87 million trading loss in the second quarter from exiting the bank's remaining exposure in April.
The losses overshadowed a strong quarter at the bank's key wealth management business, where UBS benefited from higher average fee-generating assets and transaction fees, compensating for a decline in net interest income. The unit, led by Iqbal Khan and Tom Naratil, posted better-than-expected pretax profit of $1.41 billion, the bank said in a statement Tuesday. It gave a mixed outlook for the second quarter, warning of lower seasonal activity while saying higher asset prices should have a positive effect on recurring fee income.
Momentum continued with $36 billion in net new fee-generating assets. UBS has decided to no longer report the broader metric of net new money, which includes idle deposits and custody assets. The bank issued $11 billion in net new loans in the first quarter, following a year of $26 billion in issuance leading the bank to meet its target early.
Mr. Hamers, six months into the job, is taking a deep look at where he can cut costs and digitalize operations, including in the high-touch business of serving the world's wealthiest people. He wants to use artificial intelligence to target how to sell more products to the world's wealthy and rethink what markets the bank operates in, with a heavy focus on Asia.
The new initiatives are expected to provide $1 billion annually in gross savings by 2023. The bank will also take a restructuring charge of $300 million in the second quarter related to their implementation.
As part of his digital plans, Mr. Hamers replaced the chief operating officer position with that of chief digital and information officer. UBS named Mike Dargan to that role, joining the group executive board on May 1, according to a separate statement. He has been head of group technology at the Zurich-based bank since joining in 2016.