Upheaval in markets has UBS on slide: Reversal of interest rate trend blamed as bank reports 68% profits decline

TURMOIL in securities markets this spring savaged the Swiss banking giant UBS's half-year results, with trading profits down by 68 per cent, far worse than expected.

UBS yesterday reported a 27.9 per cent drop in first-half pre-tax profits to Sfr929m (pounds 451m) and said that 1994 operating results were not likely to match those of 1993.

Analysts had been expecting all the big Swiss banks to report lower trading profits than last year as ideal market conditions were followed by an unexpected jump in US interest rates in the spring.

UBS was expected to suffer a reduction of 30-50 per cent in trading profits for the six months to 30 June 1994, but instead they collapsed from Sfr1.54bn to Sfr493m. Analysts yesterday cut their profits forecasts for the whole year.

The bank said it had made clear that last year's exceptional performance would not be easy to follow.

'And so it was - the unexpected and sustained reversal in the downward trend of interest rates throughout most of Europe unnerved the financial markets, precipitating a sharp correction,' the bank said.

Big losers were UBS's bond and interest rate derivative trading operations. Foreign exchange, banknotes and precious metals also fell short of expectations.

'The main conclusion one can draw is that the bank had certain expectations for interest rate movements and it went wrong,' Jim Hyde, of Williams de Broe in London, said.

Mr Hyde had been expecting 1994 full-year earnings of about Sfr2.4bn, or 97 francs a share.

He will probably now cut his forecast to about Sfr1.95bn, or Sfr80 a share. Several other analysts said they planned no full-year revisions, but they had already forecast yearon-year declines of as much as 15 per cent.

Whether 1994 group profits will be higher, lower or unchanged against last year's Sfr2.268bn would depend largely on the charges for write-offs and doubtful debt provisions, the bank said.

First-half expenses for depreciation, value adjustments and provisions fell by 26.4 per cent to Sfr790m from Sfr1.074bn. Analysts had expected a drop of only about 20 per cent.

UBS said its net interest income fell by 6.9 per cent to Sfr1.78bn, again greater than expected, and the 'surprising rebound in interest rates' caused a contraction in interest margins.