UBS's Rich Clients Pull Funds as Investment Bank's Losses Mount

By Elena Logutenkova

Aug. 11 (Bloomberg) -- UBS AG, the world's biggest money manager for the wealthy, may report that private-banking clients removed funds for the first time in almost eight years in the second quarter as losses at the securities unit mounted.

Clients probably withdrew a net 5 billion Swiss francs ($4.6 billion) in the period, according to the median estimate of 10 analysts surveyed by Bloomberg. UBS's wealth management units, which oversee 1.84 trillion francs, attracted an average of 37.9 billion francs in each quarter last year.

The withdrawals may signal an erosion of confidence in UBS after it amassed 25.4 billion francs of net losses, the most of any bank, in a mistimed bet on the U.S. mortgage market. UBS, led by Chief Executive Officer Marcel Rohner, has also been buffeted by U.S. regulators' claims that it helped clients evade American taxes and fraudulently sold auction-rate securities.

``Within private banking, reputation is something that takes a very long time to build and that you can lose very quickly,'' said Andrew Lynch, who manages about $2.5 billion at Schroder Investment Management Ltd. in London. Withdrawals are ``a lead indicator of concern amongst their clients.''

UBS said Aug. 8 it will buy back as much as $18.6 billion of auction-rate securities and pay $150 million of fines, the largest settlement in a U.S. probe into whether banks stuck clients with hard-to-sell bonds. The bank, which will set aside about $900 million in the second quarter to account for the settlement, follows New York-based Citigroup Inc. and Merrill Lynch & Co. in yielding to regulatory pressure to make investors whole.

Securities Unit Loss

The settlement ``provides further relief, beginning in September, to investors who have been understandably frustrated by the industry-wide failure of the ARS market,'' Marten Hoekstra, the head of UBS wealth management in the Americas, said in a statement.

The largest Swiss bank may report a second-quarter net loss of 281 million francs, compared with a profit of 5.55 billion francs a year earlier, analysts estimated before the Aug. 8 announcement. The bank said in July results were ``at or slightly below breakeven,'' in the quarter after about 3 billion francs in tax credits. Following the settlement, UBS said its results would still be ``consistent'' with that guidance.

UBS fell 53 percent this year in Swiss trading, the fourth- worst performance on the 71-company Bloomberg Europe Banks and Financial Services Index.

The securities unit may post a pretax loss of 5 billion francs after about 5.5 billion francs in writedowns tied to the U.S. subprime crash, according to analysts. The division made more than $38 billion of markdowns in the previous nine months.

`Shocked and Insecure'

Wealth management earnings probably dropped 20 percent to 1.33 billion francs, analysts estimated. UBS last suffered net withdrawals from the private bank in the fourth quarter of 2000, when clients removed about 700 million francs.

Rohner, 43, and Chairman Peter Kurer, 59, are cutting 5,500 jobs and pledged to shrink the investment bank to make it better complement wealth management. UBS's competitors are attracting funds as its clients and employees defect.

``Customers, even those who've been with UBS for years, are shocked and feel insecure,'' said Jens Ehrhardt, who oversees about $18 billion at Dr. Jens Ehrhardt Kapital AG in Munich. He said he has attracted ``several hundreds of million euros'' from former UBS clients.

Zurich-based Credit Suisse Group AG's wealth management unit added a net 15.4 billion francs in the second quarter, the most in two years, after hiring 120 advisers in three months. Julius Baer Holding AG said wealthy clients invested 8 billion francs in the first half as 49 new relationship managers joined the firm.

`Losing Talent'

UBS lost seven of 33 wealth management advisers and three assistants at its branch in the Alpine resort of St. Moritz. Half a dozen, including Heinz Inhelder, who headed the branch, joined Julius Baer.

``The opportunities to hire great people in today's environment have never been better,'' Alex Widmer, head of Bank Julius Baer, said at a news conference last month. St. Moritz ``is the place where by far the most assets are booked in any tourist destination.''

In May, 18 wealth management advisers and 32 supporting employees left UBS to join London-based Vestra Wealth LLP. Bank Sarasin & Cie. said this month it hired Elina So, the country team head in Hong Kong for UBS since 1998.

``I'm concerned about UBS losing talent and the teams,'' said Juan Manuel Mendoza, who helps manage about $104 billion at Clariden Leu, including UBS shares.

UBS said last month it will stop servicing accounts for American clients at units that aren't licensed in the U.S., in response to an Internal Revenue Service summons for customer information as part of a tax probe. The Swiss Finance Ministry is evaluating whether UBS should go along with the IRS's request.

Such a move ``could significantly damage the offshore private banking franchise,'' Credit Suisse analystsDaniel Davies and Rupak Ghose said in an Aug. 7 note to clients.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net