Strong Swiss franc hurts UBS

Union Bank of Switzerland (UBS) announced disappointing first-half results yesterday, which included a big leap in bad-debt provisions, reflecting the pain inflicted on Swiss small- and medium-sized business by the strong Swiss franc.

The franc has appreciated more than the German mark this year. UBS had to increase the amount set aside for provisions, write-offs, value adjustments and depreciations in the first half of 1995 to SwFr902m (pounds 488m) from SwFr790m in the first half of 1994.

The Swiss bank said in a letter to shareholders it was "cautiously optimistic" for the full year after reporting a 10.4 per cent drop in group net profit to SwFr832m for the half.

Although the bank does not break down figures for its extensive investment banking operations in London, the City operation appeared to do well. Trading income increased by 75 per cent to SwFr861, although this was compared with a poor figure in the first half of 1994.

Trading contributed a fifth of total income against only a tenth last time, the letter said. "Equity and bond trading revenues were substantially higher than in the previous year, but trading in interest rate instruments was unsatisfactory. Earnings from foreign exchange, bank note and precious metal trading matched the previous year's level fairly exactly."

A spokeswoman for UBS said the main reason for the high level of provisions was the continued weakness in the property market in the French-speaking part of Switzerland. Swiss economists have revised downwards their growth forecasts due to a slowdown in the growth of key trading partners and the strong franc.

The spokeswoman said a forecast of "cautious optimism" for 1995 in effect means the bank does not know whether its group net profit this year will be higher or lower than in 1994. "The final result will be determined by write-downs and provisions and that depends on economic developments in Switzerland," she said. "The profits will also depend on financial markets, which should be better in the second half, but the decisive factor is provisions." The spokeswoman added that if the Swiss economy continued to improve in the second half, provisions could be slightly lower.

As late as April, UBS's chief executive, Robert Studer, told the annual shareholders' meeting he was confident the bank would present a good six- month result and a strong performance for the year.The forecasts were based on the belief economic growth would continue and the need for provisions would drop.