UBS’s assets under management reached a record $2.5 trillion in the third quarter of 2019, buoyed in part by money from rich clients. Unfortunately, the world’s largest wealth manager is finding it harder to squeeze more profit out of this business; its chief executive officer Sergio Ermotti may be running out of ideas.
Net profit at the Swiss bank fell 16% in the third quarter to $1.05 billion, when compared to same period last year, as income from lending and recurring fee revenue declined. While the wealth unit did better than expected, the group’s profitability took a hit and is well below the 2019 target.
Ermotti is counting on a senior recruit to find new ways of making money, evidence of the challenges dogging UBS. The CEO told analysts he’s asked Iqbal Khan, a star wealth manager he brought over from Credit Suisse (
In fairness, rock-bottom (or negative) central bank interest rates are squeezing the profit of all lenders. The 25 basis-point cut in the Federal Reserve’s rates meant a $60 million hit for UBS.
The bank hopes to offset that impact by introducing charges on its euro and Swiss deposit accounts, a move designed to encourage clients to move their cash to products where UBS can generate a fee. It’s a bet worth making, but charging on deposits has led customers to take their business elsewhere in the past. There’s no guarantee it won’t happen again.
Ermotti wants to improve returns by shifting rich customers to so-called private transactions, where people can invest in structured products away from the public equity and bond markets. This mimics Credit Suisse, in a reversal of traditional roles. UBS has been the industry model for how to make a success of wealth management.
Meanwhile, the shrunken UBS investment bank is sputtering. The unit, which is geared toward Asia and Europe, reported a 59% drop in adjusted pretax profit as revenue at its advisory business plummeted. The lender will take a financial charge next quarter to reorganize the investment bank by cutting jobs and focusing on fewer coverage areas. It needs to urgently improve its standing in the U.S., the deepest capital market.
Given the bank’s cautious outlook on net interest income it’s hard to see UBS meeting its main profitability target this year. “We need a more normalized environment,” Ermotti told Bloomberg Television. The bank’s return on common equity Tier 1 (a measure of its profitability) fell to 13.8% for the nine months through September, down from 16.3% in the same period last year, and well below the 15% goal.
Ermotti also pointed to the need to improve efficiency, another objective that remains elusive. The firm’s adjusted cost-to-income ratio rose to 77.7% in the first nine months from 75.7% a year ago, and remains above the year-end target of 77%.
UBS is preparing to update its strategic targets in January, which might see a pruning of projects as the bank sticks to its dividend and buyback commitments. A potentially hefty French fine for alleged tax fraud is clouding the horizon for capital returns. Investors will hope Khan has some rabbits in his hat.
Bloomberg News
