UBS Turns In Strong FX Results, Placing Second To Citibank In 1H

ZURICH--The major Swiss banks have reported first half results; however, Credit Suisse Group is not publicly releasing a separate account of interim forex revenues.

UBS reports half-year revenues from FX and bank note trading were CHF965 million ($634.9 million), which places it behind Citibank as the second largest international forex trading bank at the interim stage.

This is contrary to a previous FX Week article (FXW, August 31) in which a UBS spokesperson stated that interim FX earnings would not be made available until year-end.

Due to the merger of Swiss Bank Corp (SBC) and Union Bank of Switzerland earlier this year, UBS's results for the first half of 1997 have been restated as CHF946 million ($647.5 million).

Credit Suisse First Boston, which can no longer be ranked in FX Week's Top 50 ranking of international reporting banks, but stood as the fifth largest bank in terms of 1997 FX revenues, also had a strong first half, says Phil Vasan, global head of FX in New York. "We have managed to outpace last year's FX results with a strong performance across the board," he says.

A spokesperson for the bank explains that the group is no longer releasing FX trading revenue figures at the interim stage, because of the reorganization of business lines.

Foreign exchange earnings are now represented in the fixed income portion of CSFB's results, and in income from Credit Suisse Financial Products (CSFP), the structured finance division of CSFB.

According to the latest report, CSFB's fixed income revenues were up 33 per cent to CHF2.896 billion ($1.97 billion) from CHF2.184 billion ($1.538 billion) a year ago. CSFP revenue was up 20 per cent to CHF1.08 billion ($735 million) from CHF899 million ($633 million) a year ago.

According to the report: "[Fixed income] growth came particularly from the corporate sector (especially high yield), real estate securitization, foreign exchange and a recovery in government bond trading."

However, CSFP reports "lower revenues in the core fixed income/FX product area".

The report also notes that fixed income revenues were not significantly diluted by losses in the emerging debt markets. "Despite turbulence in Asia and Eastern Europe, the emerging markets group (up to June 30) maintained the comparable period's level of revenues, as did money markets," the report says.

However, CS Group's net trading profits fell during first-half 1998, to CHF2.954 billion ($1.943 billion) compared with CHF3.112 billion ($2.129 billion) reported for the second half of 1998. According to analysts, the losses stemmed from trading activities in Asia and Latin America; although, these losses are not related to the FX operation.

Andrew Ipkendanz, Credit Suisse Group's global head of emerging markets, was unavailable for comment on the bank's fortunes in the emerging debt and currencies markets.

In a statement on August 26, CS Group announced estimated losses of CHF373 million ($254 million) for the period between June 30 and August 26, due to CSFB's emerging markets exposure at the time of the collapse of the Russian rouble.

The estimated loss cuts CSFB's half-year net profits of CHF1.108 billion ($754 million) to CHF735 million ($500 million).

The half-year statement details CSFB's net exposure to the Russian FX forwards market at $510 million. Exposure to the Brazilian FX forwards markets, at the close of business on September 4, was $300 million. Meanwhile, total group exposure to the FX and precious metals markets in Asia, at close of business on September 3, was $633 million.

"Subsequent to June 30, 1998, the worldwide financial markets have experienced significant downward revaluations, most notably in Russia…Given Credit Suisse Group's leadership position in the asset gathering and financial intermediation businesses, our second-half operating results are bound to be impacted by these worldwide revaluations," the report states.

Meanwhile, at UBS, the bank also appears to be suffering in emerging markets. Jack Flaherty, managing director of emerging markets for Warburg Dillon Read in Stamford, Connecticut, resigned last week. A spokesperson for the bank says it has restructured, naming Cliff De Souza and David Biase, as joint heads of the bank's Latin American and European emerging markets divisions.

The resrtructuring is "in response to prevailing market conditions and to complete some fine tuning of organizational issues that are related to the merger of UBS and SBC", the spokesperson says.

Like other international FX players, the Swiss banks benefited from strongly trending markets in the first half, particularly in Japanese yen crosses. The Swiss banks also benefited from the low interest rate environment in both the Swiss franc and the yen, which favoured banks that are actively involved in leveraged trading, says Michael Wallace, manager of European currency analysis at Standard & Poor's MMS International in London.

"For the Swiss banks, the action is all in the derivatives market, both in terms of hedging and directional trading. Their success in foreign exchange is a question of whether they get the volatility right on the options," confirms James Hyde, banking analyst at Merrill Lynch International in London.

CS's Vasan supports this market view. "Even though our spot flows have been quite heavy this year, our option business has blown out all previous records," he says.

The Swiss banks are also well-placed to benefit in the second half from corporate activity in the derivatives markets, as demand expands for euro instruments.

However, according to Merrill Lynch's Hyde, overlap in the clientbase of the former Union Bank of Switzerland and Swiss Bank Corp is likely to depress UBS's second half FX earnings.

Based on net group trading income results, UBS AG is only marginally ahead of CS Group at the half-year stage. At year-end 1997, the former SBC stood as the third largest international FX trading bank, while the former Union Bank of Switzerland stood in seventh place.

Last month, UBS reported net trading income for the first half as CHF3.176 billion ($2.1 billion), from CHF3.586 billion ($2.45 billion) a year ago. This compares with CS Group's reported net trading income of CHF2.954 billion ($2.01 billion), for the first half of 1998, a 34 per cent increase from CHF2.2 billion ($1.497 billion) for the same period last year.

UBS officials decline to comment on the CHF410 million ($280 million) loss, which includes a 38 per cent year-on-year decline from the bank's interest rate products group. However, according to Swiss sources, emerging markets losses, the fallout of key personnel from the former UBS, and client overlap, may have contributed to lower revenues in all sectors.

Meanwhile, Bank Julius Baer reports FX and precious metals trading income for the first half of the year was CHF54 million ($35.5 million), a 6 per cent increase from CHF51 million ($34.9 million) reported by Julius Baer for the same period last year (FXW, August 31).