in finance home work due 3 pm monday 26
s3u386UBS Investment Bank
UBS Investment Bank is one of the top fee-generating investment banks in the world. Its traditional strengths are advisory, research, equities, foreign exchange and precious metals. The Investment Banking Department in the UBS Investment Bank furnishes a series of advisory and underwriting services such as mergers and acquisitions, restructuring, investment grade and high yield debt offerings, leveraged finance and leveraged loan structuring and so on.
Financial Ratios Analysis
Return on Assets (ROA) measures the efficiency that the management uses its assets to generate earnings. The ROAs of UBS Investment Bank were positive before and after financial crisis (2006, 2010 and 2011). However, during the years of financial crisis (2007 to 2009), UBS Investment Bank suffered negative ROAs; that means it invested a high amount of capital into its production while received little income.
Return on Equity (ROE) measures a company’s profitability. It shows that how much profit a company can generate with the money shareholders have invested. UBS Investment Bank had positive ROEs in the years 2006, 2010 and 2011 while had negative ROEs in the years of financial crisis (2007, 2008, 2009). Those negative ROEs show that UBS Investment Bank lost shareholders’ money and was not profitable in the financial crisis.
Debt to Equity ratio measures a company’s financial leverage; it shows the relationship between the capital contributed by creditors and the capital contributed by shareholders. UBS Investment Bank had high Debt to Equity ratios before and during the financial crisis, especially in 2007 and 2008. This indicates that UBS Investment Bank was easily to go debt default because it might not be able to generate enough cash to satisfy its debt obligations. Compared to the ratios from 2006 to 2009, the ratios were low in 2010 and 2011. Investors usually prefer low Debt to Equity ratio because their interests can be better protected when the business declines. In the periods of financial crisis, the businesses of financial institutions were more likely to go down so high Debt to Equity ratios might scare investors away.
Equity Multiplier measures a company’s financial leverage; it shows how a company uses debt to finance its assets. During the years 2006 to 2009, Equity Multipliers of UBS Investment Bank were high, especially in 2007 and 2008. This shows that UBS Investment Bank highly relied on debt to finance its assets before and during the financial crisis. Highly relying on debt may increase the possibility of a company to go debt default, especially in the periods of financial crisis so investors might think that it was too risky to invest in UBS Investment Bank in the periods of financial crisis. Equity Multipliers were relatively low in the years 2010 and 2011; that shows a low reliance on debt to finance assets and gives investors more confidence to inject money in UBS Investment Bank.
Time Interest Earned measures how well a company can cover its interest payments on a pretax basis. In the years before and after financial crisis, Time Interest Earned of UBS Investment Bank were above 1; this shows that UBS’s income before interest and tax was enough to pay off its interest expense. However, Time Interest Earned were below 1 in the years of financial crisis; this means that UBS failed to meet its interest obligations and this was a risky signal to go bankruptcy.
Based on Debt to Equity and Equity Multiplier, it’s not hard to find that UBS had many debts before and during financial crisis (2006 to 2009). UBS began to issue a large amount of subordinated debt before financial crisis because subordinated debt could bring UBS much more benefits while simultaneously much more risk. This planted hidden danger for the whole economic market and accelerated the occurrence of financial crisis. Before financial crisis, another problem in UBS Investment Bank was Dillon Read Capital Management division (DRCM). DRCM, which was a large internal hedge fund, was formed to keep some of the bank’s traders from defecting to hedge funds as well as to create a position for John Costas who was the CEO of UBS Investment Bank. In 2006, DRCM brought a profit of $720 million to UBS but after UBS took over the position of DRCM in May 2007 and removed hedges, a $3.04 billion loss was generated by DRCM. For making up the loss, The UBS Investment Bank continued to expand subprime risk. This further accelerated the occurrence of financial crisis.
After the expansion of subprime risk in 2006 and 2007, UBS Investment Bank continued to lose money in 2008 when it announced in April 2008 that it was writing down a further $19 billion of investments in subprime and other mortgage assets. Responding to its losses, UBS announced a CHF15 billion rights offering to raise the additional funds need to shore up its depleted reserves of capital. Besides, UBS cut its dividend in order to protect its core capital which was seen by investors as a key to its credibility. Although UBS announced that it placed CHF6 billion of new capital and put $6 billion of equity into the new “bad bank” entity in October and November 2008, its losses continued increasing under the impact of financial crisis. In February 2009, UBS announced that it had lost nearly $17.2 billion in 2008 which was the biggest single-year loss in Swiss history. Since the beginning of the financial crisis in 2007, UBS has written down more than $50 billion from subprime mortgage investments and cut more than 11000 jobs.
By the spring of 2009, UBS started a plan to return to profitability. Meantime, UBS announced the planned elimination of 8700 jobs and implemented a new compensation plan. Under the plan, no more than one-third of any cash bonus would be paid out in the year it is earned with the rest held in reserve and stock-based incentives that would vest after three years. Top executives would have to hold 75% of any vested shares. Additionally, the bank’s chairman would no longer receive any extra variable compensation, only a cash salary and a fixed allotment of shares that could not be sold for four years. By the summer of 2009, UBS began to recover itself from financial crisis and its profit gradually increased. The effect of recovery became obvious in 2010 and 2011 as UBS’s ROAs and ROEs went up to positive.
The UBS and The Whole Industry