UBS reported an operating loss, before tax and minority interests, of 726 million Swiss francs for the third quarter. However, it anticipates a return to profitability in the current quarter.

The firm notes that its announced loss is within the range given in the pre-announcement on Oct. 1, forecasting a loss of CHF600 million-CHF800 million. After tax and minority interests, the net loss attributable to shareholders was CHF830 million.

The deterioration in UBS’s performance in the third quarter was mainly due to the substantial losses and writedowns in trading positions related to the U.S. subprime residential mortgage-backed securities market, leading to revenue of negative CHF4.2 billion in the investment bank’s fixed-income, currencies and commodities business.

UBS notes that these positions were hedged. However, it said that the deterioration in the U.S. subprime market, especially in August, was so severe and sudden that markets turned illiquid. There was a substantial deterioration in the value of these securities — including those with high credit ratings. Conditions in the U.S. housing market continued to be weak in the quarter, and the end of September, valuations UBS has put on its holdings of U.S. mortgage-linked securities reflect this, it said.

The firm said its other businesses showed sustained strength. The wealth management businesses had an excellent quarter, with record levels of profitability. Asset gathering performance remained strong, with inflows of net new money in the wealth management businesses totaling CHF40.2 billion in the quarter. Fees in both wealth and asset management remained high. For the whole of UBS, net fee and commission income was significantly higher than the levels recorded in third quarter 2006 and only slightly below the all-time high set in second quarter 2007.

On top of the strong performance in wealth and asset management, this also reflected year-on-year gains in the investment bank’s equity underwriting and corporate advisory business, plus strong commissions in its equity cash business. Revenue also rose, year-on-year, in some of its trading businesses, in particular equity derivatives, prime brokerage, rates derivatives, and government bonds as well as the client-facing distribution area of the money market, currencies and commodities business.

Despite the disappointing third quarter result, UBS’s performance in the nine months ended Sept. 30 has been strong. Over this period, net profit attributable to shareholders from continuing operations was CHF7.7 billion. Excluding the gain from the sale of the Julius Baer stake and DRCM closure costs in second quarter, net attributable profit would have been CHF6 billion compared with CHF8.4 billion a year earlier.

UBS said that the fourth quarter has started with good results from all businesses, including the investment bank. “However, the FICC business remains exposed to further deterioration in the US housing and mortgage markets as well as rating downgrades for mortgage-related securities, which could lead to further writedowns on the positions,” it cautioned. “As a result, UBS is not assuming that the quarter will continue as positively as it has begun, or that the current difficulties will be resolved in the short term. To be specific, we believe it is unlikely that the Investment Bank will contribute positively to UBS results for the last three months of the year. Markets remain uncertain, but based on current information, the group should return to profitability in fourth quarter.”

Added UBS CEO Marcel Rohner: “Our third quarter result was unquestionably disappointing. However, we have introduced a number of measures to improve performance. With the new management team, we are implementing changes to address the weaknesses that led to the losses. These include the management, structure, and size of our balance sheet. We are also taking steps to strengthen our market risk management and control framework.”