March 25, 2023

DealBook: UBS Profit Falls on Facebook Loss

Sergio P. Ermotti, right, chief of UBS, and Thomas C. Naratil, the Swiss bank's chief financial officer.Arnd Wiegmann/ReutersSergio P. Ermotti, right, chief of UBS, and Thomas C. Naratil, the Swiss bank’s chief financial officer.

LONDON — UBS reported on Tuesday a 58 percent decline in its net profit in the second quarter as a fall in investment banking income weighed on the Swiss bank.

The drop in profit comes as the chief executive of UBS, Sergio P. Ermotti, is paring back the firm’s investment banking unit and expanding its wealth-management division.

Market volatility connected to the European debt crisis has hit trading activity across the financial services sector.

Like many of its rival, UBS’s investment banking unit continued to face difficult market conditions, and was also hit by a 349 million Swiss franc, or $356 million, loss connected to the botched Facebook initial public offering.

The bank said the lack of a solution to the European debt crisis and the Continent’s banking problems could harm the firm’s future profits.

“Failure to make progress on these key issues, accentuated by the reduction in market activity levels typically seen in the third quarter, would make further improvements in prevailing market conditions unlikely,” UBS said in a statement.

Net income at the Swiss bank, which was below analysts’ estimates, fell to 425 million Swiss francs during the three months through June 30, compared with 1.02 billion Swiss francs in the same period a year earlier. Operating income fell 10.6 percent, to 6.4 billion Swiss francs.

In early morning trading in Zurich, UBS shares fell 4.9 percent. Stock in the bank has dropped around 8 percent over the last 12 months.

Lower trading revenue and the loss incurred from the Facebook I.P.O. hurt UBS’s investment banking unit. In total, the division reported a pretax loss of 130 million Swiss francs in the second quarter. UBS does not provide net income figures for its separate business units.

Technical errors at Nasdaq exchange caused a delay in the start of trading of Facebook shares and later flooded the market with the social networking company’s stock. The problems caused UBS to receive more shares than its clients had ordered, according to a company statement.

“We will take appropriate legal action against Nasdaq to address its gross mishandling of the offering and its substantial failures to perform its duties,” the bank said.

Despite the declining activity in its investment banking unit, UBS said its wealth-management businesses had received 13.2 billion Swiss francs of new money during the second quarter of the year.

UBS continues to reduce its exposure to risky assets after a string of recent scandals, including a $2.3 billion trading loss prosecutors say was caused by Kweku M. Adoboli, a former trader at the bank.

The Swiss financial giant said it had cut its risk-weighted assets by 45 billion Swiss francs in the second quarter. The bank now plans to reduce the total figure to 270 billion Swiss francs by 2013, more than the previous target of 290 billion Swiss francs.

UBS said its core Tier 1 capital ratio, a measure of a firm’s ability to weather financial shocks, had risen to 8.8 percent, and would reach 9 percent by the end of the year.

The firm also cut more than 700 jobs during the three months through June 30, as part of the bank’s plan to achieve annual savings worth 2 billion Swiss francs by 2013. Last year, the Swiss firm said it would cut 3,500 jobs, with about half of the layoffs to come from its investment banking division.

UBS is also subject to several investigations into the manipulation of the London interbank offered rate, or Libor. Mr. Ermotti of UBS said the bank was in the process of conducting an internal review related to Libor and other benchmark rates. The British bank Barclays agreed a $450 million settlement last month with American and British authorities after some of its traders and senior executives were found to have altered the rate for financial gain.

In a conference call with reporters, Tom Naratil, the bank’s chief financial officer, declined to comment on whether UBS had made specific provisions to cover potential fines connected to the manipulation of the rate. The Swiss bank, however, set aside a further 130 million Swiss francs during the second quarter to cover litigation and regulatory issues, but did not say if the extra money was related to Libor.

“We have provisioned accordingly for all matters,” Mr. Naratil said.

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DealBook: Many Regulators Put Their Attention on How JPMorgan Marketed Its Funds

Regulators are examining JPMorgan Chase’s sales tactics, after claims that the nation’s largest bank pushed its own mutual funds over competitors’ investments.

Authorities are responding to current and former JPMorgan financial advisers who said they had felt pressure to sell the bank’s products even when cheaper or better performing options were available.

Several brokers told The New York Times that they had been encouraged to favor JPMorgan funds, and they described a broader culture that emphasized sales over client needs. Also, in the marketing materials of one major offering, JPMorgan published hypothetical performance results, even though actual returns existed, according to internal bank documents reviewed by The Times. In each case, the actual gains were lower than the theoretical results.

Now, regulators, including the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Manhattan district attorney and officials in New Jersey and Delaware, have opened inquiries into JPMorgan’s sales practices, according to several people briefed on the activities but not authorized to speak on the record. The S.E.C. and New Jersey’s Office of the Attorney General have scheduled several interviews related to the case, these people said.

The people cautioned that these inquiries, directed at the bank’s Chase Wealth Management division, are at an early stage. No one at JPMorgan has been accused of any wrongdoing.

While the bank declined to comment on regulatory matters, a spokeswoman, Melissa Shuffield, said that JPMorgan “doesn’t pressure brokers to sell its funds over any other product.”

“We stand behind the integrity of our investment process and fund selection and always place our clients’ interests first in every decision,” Ms. Shuffield said.

In the wake of the financial crisis, JPMorgan made an aggressive effort in this area, building up its mutual fund offerings and expanding its brokerage sales force. The strategy, which runs counter to the approach favored by much of the industry, proved successful. Even as small investors left the stock market in droves, JPMorgan collected billions of dollars, becoming one of the largest mutual fund managers in the country.

JPMorgan managed to attract assets, even though the performance of its funds has been just above average. Fifty-nine percent of its funds beat their peer group average for the three-year period ending on June 30 of this year, according to Morningstar, a fund researcher.

JPMorgan’s efforts have been lucrative. The bank collects a fee on every dollar that it manages.

Such financial incentives, industry experts say, can create potential conflicts. The worry is that banks will favor their own product for profit reasons rather than focusing on clients’ interests. It is one of the major reasons many of JPMorgan’s rivals have backed away from selling their own mutual funds.

JPMorgan defends its strategy, saying that customers want its funds and that it has “in-house expertise.”

One of the bank’s core offerings is the Chase Strategic Portfolio, which contains roughly six investment models. These investments, which contain funds created by JPMorgan and competitors, are intended to provide ordinary investors with diversified exposure to stocks and bonds. The bank heavily promotes the Chase Strategic Portfolio in its branches around the country.

The product comes with a double layer of fees. Besides the underlying cost for its mutual funds, JPMorgan also collects an overall management fee.

Investors pay as much as 1.6 percent of assets annually. The bank says the average fee is closer to 1.2 percent, adding that competitors charge as much as 2.75 percent for similar products.

Prospective clients do not have a true sense of the product’s returns. Marketing documents for the Chase Strategic Portfolio highlight theoretical returns, even though many of the models have actual three-year returns, which were lower.

The bank said individuals who invest in the product are provided with actual performance. JPMorgan further noted that models in the Chase Strategic Portfolio, after fees, had gained 11 percent to 19 percent a year on average since 2009, which the bank says is competitive.

JPMorgan says it follows industry standards in its marketing. The firm says its common practice is to wait until all the components of the portfolio have a three-year return before citing performance in marketing efforts. The bank is currently preparing to add the real returns to sales materials.

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Square Feet | The 30-Minute Interview: Gary Jacob

Q Exactly how many apartments are in Glenwood’s portfolio?

A I’m not at liberty to share that. Leonard Litwin is very private about that, although you could go on the Web site and pretty much figure out the number of buildings. I go to meetings with him with banks, and they ask, ‘How many units do you have?’ His answer is ‘thousands,’ or ‘many.’

Q How involved is Mr. Litwin, in his mid-90s, in the company?

A He’s still actively involved in everything we do. He comes to the office every day, goes to all of our meetings and has final say on almost everything. He’s actively involved in our new construction projects — he pores over the architectural plans to make sure we have the proper amount of closet space and is very detail-oriented. He certainly won’t retire.

Q Was Mr. Litwin your mentor?

A Absolutely.

Q What are your duties?

A I’m the face to the public of Glenwood. I’m the person who handles all the site acquisitions and financing. His daughter, Carole Pittelman — she’s technically an executive vice president — handles the construction projects and oversees the management division as far as expenses and renovation of units. I work hand in hand with her and Mr. Litwin helping to run the company.

Q So how is business?

A Business is, knock on wood, very good. We did end up taking a dip in rental prices. We had to give concessions, and we were paying the brokers for a few years as rents started going down in 2008. By January 2009 they hit a low point. The rental market has since come back — the demand is there.

Q When the market was booming, did Glenwood ever consider converting to condos?

A We’ve never, ever converted any of our buildings. Leonard Litwin did have some experience building co-ops before I joined the company in 1973. But in my 38 years here we’ve never contemplated building a condo, and we never even thought about converting anything. He really enjoys his buildings. He also feels that over time the value goes up, and he’s been proved right.

Q What’s your vacancy rate portfoliowide?

A We now have the lowest vacancy in three years: it’s 1 percent. It might have been 2.5 percent a year and a half ago.

Q Is the new Emerald Green building fully occupied?

A Yes. We’ve been renting them rapidly, without concessions and without paying broker fees.

Q You have applied for LEED certification there.

A We’re hoping to get a silver certification.

Q What’s the status of the Crystal Green?

A We finished the excavation, and now we’re coming out of the ground to get to the ground-floor level. We should be able to start renting maybe next spring, with completion by next summer.

The Crystal Green will have 199 units on 39th Street, and as part of the same project, we’re building a six-story, six-unit building, which will be very high end, on the 38th Street side. It’ll stand on its own, and we might give those tenants the services of Emerald Green, which is right across the street.

Q Glenwood recently closed on a parcel from Fordham University on Amsterdam Avenue and 62nd Street, with the plan to build another residential tower. What’s the status of that?

A We’re hoping to break ground in October. It’s going to be a 54-story building — very deluxe with lots of glass. This is adjacent to Lincoln Center.

Q What else are you working on?

A We’re working on two other projects — also residential rentals, both on the West Side — but it’s too soon to talk about them. We’re in the process of acquisition. One of them is a distressed opportunity; the other one is not.

Q Your focus has been on sustainable construction.

A We believe it’s the right thing to do for the environment. It’s also a good marketing tool, and to some extent tenants ask about it.

Q Glenwood has also invested in electric car chargers.

A We’re outfitting some of our garages with outlets for electric cars. We already have three chargers in Emerald Green. But there aren’t enough electric cars out there yet — I think the auto companies have to catch up — so they’re not getting a lot of use. But we’re ready for it.

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