UBS group signals potential return to share buybacks

Bloomberg

UBS Group AG signalled the worst hit of the coronavirus crisis on its balance sheet may be over, prompting the bank to consider reviving shareholder payouts as it seeks to boost the shares.
The Swiss bank — while warning of uncertainty ahead — attracted $9 billion of net new money at the private banking business in the second quarter and saw higher transaction-based income as clients boosted trading in volatile markets. While costs to cover bad loans will stay high in the second half, they’re set to decline from the $540 million the bank set aside in the first six months.
UBS is better placed than some rivals to reconsider capital returns because it’s relatively shielded from the expected wave of bankruptcies that prompted Wall Street firms to set aside tens of billions of dollars. It also benefited from the trading bonanza that saw the top US banks post record profits, though to a lesser degree than peers after paring the investment bank in recent years.
Dividend payments and buybacks are controversial because of the relief that banks have received from regulators to help them withstand the crisis and the risk of a two-speed system developing where stronger European banks pushing to be allowed to resume payouts. Finma, the Swiss watchdog, followed the ECB which urged banks to postpone dividends until at least October to conserve capital because of the coronavirus outbreak.
UBS and Credit Suisse Group AG were among the last European firms to delay their dividend. Chief Executive Officer Sergio Ermotti said he’s now confident that the bank would pay the second tranche of its 2019 dividend in the second half and may revive a $450 million buyback program it halted in March. The bank is also considering changing the level of buybacks versus dividends.
The Swiss bank added $272 million to its loan loss provisions during the quarter, slightly below estimates, with Europe starting to reopen businesses. By comparison, five of the biggest US banks put away $35 billion combined during the three months, trying to predict how bad things could get with the pandemic still ravaging the world’s largest economy. UBS reiterated that the majority of its credit exposures are of high quality, in part reflecting the wealth of its home country.
UBS joins lenders including European rival Deutsche Bank AG in predicting that provisions to cover souring credit are peaking. It’s also predicted along with Wall Street firms that the volatile market conditions that boosted trading revenue in the first half probably won’t endure.
The wealth unit, UBS’s largest contributor of revenue, showed resilience during the worst of pandemic, with net new money positive across the regions. UBS has been passing on the cost of Europe’s negative interest rates to more clients, charging them for deposits above a certain size that aren’t invested.
Less positively, recurring net fee income declined 8% at the wealth management business, mostly reflecting lower invested assets at the beginning of the quarter.
Wealth management profit in Asia helped make up for a 37% drop in profit year-on-year for the business in the Americas. That region faced strong headwinds last quarter due to lower invested assets, which affect recurring fee income, and lower dollar interest rates.
Ermotti, who will step down at the end of October, has scaled down trading after the financial crisis, though the bank still has a sizable equities business.
While many lenders, particularly in Europe, have reduced their trading operation after the financial crisis, the pandemic has shown the benefits of maintaining such a business, which can provide a hedge during times of crises and make money while other parts of the bank suffer from loan defaults.