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UBS is reviewing its family office business in the wake of Archegos as analysts grill execs on surprise $861 million hit (UBS)

UBS Chairman Axel Weber, left, and CEO Ralph Hamers speak during a news conference in Zurich, Switzerland in February 2020.Arnd Wiegmann/Reuters

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UBS is reviewing all client relationships in its family office and prime brokerage businesses after the collapse of fund Archegos left the Swiss bank with $861 million in losses, a sum that blindsided analysts on Tuesday and underscored the ripple effects of Archegos' downfall. 

The firm sustained a loss of $774 million in the first quarter as one prime brokerage client defaulted, eating into first-quarter profits, and an additional $87 million hit for the second quarter, UBS Chief Executive Ralph Hamers said during a call to discuss quarterly results.

The size of those losses surprised analysts on the line, most of whom needled Hamers and Chief Financial Officer Kirt Gardner over how UBS was exposed to the family office. 

"You say it's idiosyncratic, but UBS has been here before," Bank of America Securities analyst Alastair Ryan said, according to a transcript on investment research platform Sentieo. "[Investment banking] revenue is down 12%, costs up 7%. Zurich writes the check when New York blows up. And it's not clear from any of the risk disclosures that I've had — 50 pages in the annual report — where I could have found this risk." 

Hamers, who joined as CEO last November from ING, acknowledged how "disappointed" the analyst sounded.

"We are disappointed as well," Hamers said. "That's why we are doing a detailed review of the individual relationships — specifically on both sides, prime brokers or [global family office] relationships — as well as the processes, the risk management processes, surrounding all of this."

Hamers said the firm is "open to dialogue with regulators" on possible changes that could improve transparency in those businesses, and that it had "already improved" some of its risk controls. 

Insider previously reported that family offices, the largely unregulated firms that oversee assets of the ultra-wealthy, are now preparing to fight the likelihood of the Biden administration looking to implement more stringent regulation. 

Archegos was a family office run by former hedge fund manager Bill Hwang, whose hedge fund Tiger Asia pleaded guilty to insider trading in 2012. Archegos collapsed when its highly concentrated positions held through a type of derivative, swaps, moved against it, and left its lenders including Nomura, Credit Suisse, and Morgan Stanley exposed.

Global banks were expected to lose up to $10 billion as a result of ties to Archegos, which was unable to meet margin calls, JPMorgan estimated in a note on April 12.

Analysts have demanded answers on Archegos across Wall Street

The pointed questions sell-side analysts directed to Hamers and Gardner on Tuesday — "I cannot understand fully that you're losing roughly the same amount as Morgan Stanley," JPMorgan analyst Kian Abouhossein said — echoed analysts' bewilderment on other banks' earnings calls this month. 

Morgan Stanley disclosed overall losses of $911 million as a result of the Archegos unraveling, which caught analysts by surprise in part because earlier news reports suggested the investment bank's losses were smaller. 

While some banks, like Credit Suisse, had warned investors they would incur a material loss as a result of its relationship with Archegos, but UBS was quieter about its involvement. Finews.com reported on March 31 that the bank "believes it will be left nursing losses of not more than low-three-digit millions from business with Archegos," citing a person familiar with the matter.

The hit to UBS also comes after it has shrunk its investment bank following the financial crisis to instead focus on growing its more stable and safer asset and wealth management business.

Analysts said Tuesday that, aside from the Archegos-linked losses, UBS turned in a relatively strong quarter. Barclays analysts led by Amit Goel told clients in a note that the size of those losses were surprising, though otherwise "underlying results were strong" in global wealth management and investment banking.

UBS reported net profits of $1.8 billion for the quarter, up 14% from a year prior. Global wealth management, co-led by Tom Naratil and Iqbal Khan, booked record pre-tax profit growth in each of its regions.

UBS shares fell by 1% midday in New York.

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