“UBS swings back to profit and smashes earnings expectations for the first quarter”, was the CNBC headline shortly after #UBS Q1-24 results announcement. But what about all other MSM? Everyone, of course, is jumping on the same celebratory bandwagon. I wonder how many of these people influencing markets and sentiment read and digested the 106 pages of UBS Q1-24 financial statements before drawing these buoyant conclusions…
Let me guide you through the woods of #UBS financials and then at the end, I will be curious to know whether you agree or not with me calling them the “La La Land” bank.
🚩 – #UBS approach to Credit Suisse (#CS) merger: cherry-pick the revenues and hide the losses.
We have already seen to what degree #UBS stretched accounting standards and rules in “DID CREDIT SUISSE BAIL OUT $UBS?” and “#UBS Jumbo Profit Fairy Tales”, but the bank has now stepped up its game to a whole new level. These are #UBS’s own words “In addition to reporting our results in accordance with IFRS Accounting Standards, we report underlying results that exclude items of profit or loss that management believes are not representative of the underlying performance”. What does this mean? Well.. #UBS tells it to us: “In the first quarter of 2024, underlying revenues exclude purchase price allocation (PPA) effects and other integration items. PPA effects mainly consist of PPA adjustments on financial instruments measured at amortized cost, including off-balance sheet positions, arising from the acquisition of the Credit Suisse Group. […] In 2023, underlying revenues also exclude losses relating to our investment in SIX Group.
Translated: #UBS is recognizing the gross revenues from #CS business EXCLUDING any negative effect from marking to market the assets acquired to their market value.
As if this wasn’t enough of a joke by itself, as a cherry on top of the cake #UBS is also excluding losses from their investment in SIX Group (the Swiss Stocks Exchange)
🚩 – #UBS greatly understated Risk Weighted Assets (RWA)
So #UBS holds a total of 1,607bn$ in assets and reports 546m$ of RWA, what’s wrong with that? Only 301bn$ of #UBS loans (605bn$) are guaranteed by any form of collateral. So let’s do some calculations here:
Total assets: 1,607bn$
Minus loans with collateral (we assume 0% RWA assuming all the collateral is good although we know it’s not): 301bn$
Minus cash and cash equivalents: 271bn$
Minus collateral from trading activities: 101.6bn$
Minus collateral on derivatives positions: 46bn$
Minus Level1 government bonds: 6bn$
*cash and collateral “assumed” at 0% RWA
Total: 881.4bn$
This means #UBS applies a ~62% RWA only to completely unsecured risk positions (and we already helped #UBS by assigning 0% RWA to assets that aren’t zero). Needless to say, this is unusually low even stretching the regulatory requirements to the limit…
Ah, one more thing, #UBS also has 295bn$ of OFF-BALANCE SHEET assets
If we include this amount in our RWA calculation the result is ~46.5% assessment on their completely unsecured risk positions. Yes, that’s quite a lot of stretching.
🚩 – After we saw #HSBC doing that last week in “IS HSBC CEO “UNEXPECTEDLY” LEAVING BECAUSE THE BANK WON’T BE ABLE TO HIDE ITS PROBLEMS FOR MUCH LONGER?”, completely defying the laws of financial markets gravity even #UBS did not include any FX impact whatsoever in their Q1-24 results. No further comments are needed here.
🚩 – What about Expected Credit Losses (ECL)? As you can see, #UBS is very optimistic about the future of the US and Swiss economies to the point that not only they IMPROVED their baseline expectations (picture 1), but they also completely removed a “Global Crisis” scenario from the projections in Q1-24 (picture 2). All this resulted in a meager 106m$ put aside for ECL and no, I am not joking.
🚩 – Why is the Swiss Central Bank suddenly asking #UBS to increase their capital by ~25bn$ as per the “Swiss central bank calls for more capital rules after Credit Suisse saga” quickly forgotten “breaking news” from 2 weeks ago?
Reason 1: #UBS has a chronic hole in their brokerage business
In Q1-24 #UBS reported 22.8bn$ “Brokerage Receivables” against 46.6bn$ of “Brokerage payables” for a NET of 23.8bn$ according to #UBS’s “fair value” estimates that to be safe I would haircut by 10% to ~26bn$. What’s wrong with this? Let’s have a look at the previous quarters
Q4-23: 21bn$ vs 43.9bn$ = -22.9bn$
Q3-23: 24.6bn$ vs 41.3bn$ = -16.7bn$
Q2-23: 21.5bn$ vs 43.9bn$ = -22.4bn$
Q1-23: 21bn$ vs 43.9bn$ = -22.9bn$
Q4-22: 17.6bn$ vs 45.1bn$ (Before #CS merger) = -27.5bn$
and on and on along the same line… but wait, when did this start?
Q4-21: 24.2bn$ vs 45.6bn$ = -21.4bn$
Q4-20: 24.7bn$ vs 38.7bn$ = -14bn$
Q4-19: 18bn$ vs 37.2bn$ = -19.2bn$
Q4-18: 16.8bn$ vs 38.4bn$ = -21.6bn$
What the heck is going on here….
To me, this looks like #UBS is running a ~25bn$ hole in their brokerage activities they clearly cannot fill, what do you think?
Reason 2: #CS’s “Negative Goodwill” of 27.7bn$ that was booked 2 quarters ago after applying its own “mark to market” to #CS assets marking a “historical” profit for a bank might not have been that positive after all (negative goodwill increases the revenues and assets in financial statements). What happens if those assets are worth 27.7bn$ less and #UBS’s CET1 capital instead of 78.7bn$ is 51bn$? Well… that will shrink their CET1 capital to 9.3%. What is the absolute minimum capital requirement for a G-SIB bank like #UBS (without considering increments because of the size)? 10%. There you go.
So basically #UBS is already under-capitalized because of #CS real asset values, still assuming their “La La Land” mark to markets on the rest of their books and the Swiss Regulator clearly knows it. Furthermore, this even excludes the “hole” we discovered in the #UBS brokerage business. I bet the regulator is aware of it too, hence the sudden “urgency” that is scaring off the bank’s management. What if we combine the 2? Well… #UBS’s CET1 will fall below the 8% absolute minimum requirement in the blink of an eye.
As I write, #UBS shares are trading up 8% celebrating the great Q1-24 results, I wonder if you agree with that now that you have read this article.
Link to #UBS Q1-24 financial report “masterpiece” here
Extend and Pretend. Thank you for the forensic analysis. Even though many of us don’t understand much of it – the bottom line is that UBS is insolvent with no real way to fill the hole and the SNB and most counterparties probably do understand this.
it’s all a confidence game now and the one who panics first, panics best.
This is exactly along the line a an accountant follower of mine said on X providing all the context. He clearly said that without getting a free pass to do what they are doing they would be screaming for a bailout indeed.