UBS Q2 profit falls due to client outflows and compliance

UBS’ profit falls 20% due to client outflows and compliance cases

July 26, 2022 12:54 PM

Interest rates haven’t gone up quickly enough to buoy UBS from a wave of compliance expenses amid a new investigation of the firm and a wider investor pullback.

Earnings for UBS Wealth Management Americas declined sharply in the second quarter, the Swiss bank said in disclosing its results on July 26. An outflow of billions of dollars in client assets amid a stock slump and inflation wiped out advisory fee levels, while regulatory expenses rose significantly on the impact of an SEC settlement that will cost the firm $25 million and provisions for a probe into the firm’s recordkeeping. In addition, the wirehouse will be going through a leadership transition in coming months.

Retail and institutional clients are reacting differently to the market forces, UBS CEO Ralph Hamers said in an interview with Bloomberg TV.

“We saw on one side private clients, given all the uncertainty, sidelining their money and waiting for things to clear up,” Hamers said. “Whereas, on the institutional side, we saw a lot of activity. And that’s what you see in our investment banking results as well.”

To see the key takeaways from UBS’ second-quarter earnings for financial advisors and other wealth management professionals, scroll down our slideshow. For coverage of the prior quarter’s earnings, click here.

Regulation and compliance

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Note: The figures refer where possible to the specific UBS Wealth Management Americas unit covering the U.S., Canada and Latin America, except when the metrics are only available for the entire Global Wealth Management segment spanning 9,200 advisors worldwide.

Leadership shakeup

Oct. 3 will mark the end of Tom Naratil’s six-year stint as the president of UBS Americas and four years as co-president of Global Wealth Management alongside Iqbal Khan, who will then take over the latter post on a solo basis. Naratil made the decision to leave the roles after 11 years on the executive board and nearly four decades with UBS and predecessor PaineWebber, according to the firm. For his replacement as president of UBS Americas, the wirehouse has hired Federal Reserve Bank of New York First Vice President Naureen Hassan. Before becoming the second-ranking official at the regional Fed, Hassan had tenures with Morgan Stanley, Charles Schwab and McKinsey.

Advisor headcount

The number of advisors employed by the wirehouse fell 2%, or a net 135 advisors, from the year-ago period to 6,139. UBS’ headcount has been sliding downward consistently since the firm slashed its recruiting offers several years ago to focus on boosting advisor productivity and retaining the largest teams. In the past half dozen years, the number of UBS brokers has slipped by a net 977.

Client assets

The wirehouse sustained an outflow of $3.5 billion in net new fee-generating advisory assets as U.S. investors paid higher-than-expected taxes, Hamers said in the TV interview. Total invested client assets tumbled by 9% year over year to $1.6 billion on the impact of falling stocks, while fee-generating advisory holdings dropped by the same percentage to $773 billion. Also in the past quarter, all Global Wealth Management clients gained the ability to sign into their accounts through QR codes.

Loans

On a gross basis, the amount of loans issued by the wirehouse through its brokers rose 20% from the year-ago period to $99.4 billion in the second quarter. Securities-based loans and mortgages comprised much of the net new loans totaling $3.8 billion, which was a slowdown of 28% when compared to the same time a year ago.

Regulatory disclosure

UBS joined Morgan Stanley, Citigroup, Deutsche Bank and HSBC in disclosing an investigation by the SEC and the Commodity Futures Trading Commission into preservation of employees' messages and emails. The probe concerns “business communications sent over unapproved electronic messaging channels,” and UBS is cooperating with the regulators, according to a disclosure in its earnings. Late last year, J.P. Morgan Chase settled a similar case involving WhatsApp messages and other communications for $200 million.

Expenses

Indeed, provisions for litigation and regulatory expenses — along with greater travel and entertainment fees, professional costs and outsourcing — combined to drive up expenses in the Global unit. Lower personnel expenses offset some of the rising costs. Overall, operating expenses hiked up by $44 million year over year to $3.5 billion in the second quarter.

Bottom line

The elevated expenses from compliance-related matters more than canceled out a small uptick in revenue for the quarter. The wirehouse’s total revenue increased 1% year over year to $2.6 billion due to higher net interest income tied to the rising rates. However, its profit before tax plunged 21% to $397 million.

Remark

Asked if lower transactions and loans in the Global unit suggests that clients are still in “fear mode” because of the current economic trends, Hamers told Bloomberg that lower stock values are pulling down recurring fees and a “wait-and-see pattern” is reducing trade volumes. On the other hand, climbing interest income nearly offset “the pressure on the fee side,” he said. “So, with that, still a good quarter.”