UBS just doesn’t want to be Goldman Sachs!

So that’s clear then. UBS Group AG isn’t trying to build its investment bank just for the sake of “being an investment bank” — the message from Chief Executive Officer Ralph Hamers as he explained the Swiss firm’s poor second-quarter performance versus Wall Street peers. A more selective approach to investment banking may make sense. But investors need to set their expectations accordingly.
UBS’s global markets businesses grew revenue by 10% year-on-year, flattered by comparison with the year-earlier period that included some losses from the
collapse of Archegos Capital Management. Within this, equities trading was up 7%, with foreign exchange, rates and credit up 19%. By contrast, Goldman Sachs Group Inc. saw a 32% jump in its equivalent business. Bank of America Corp and JPMorgan Chase & Co delivered mid-teens growth in markets revenue. Goldman and Morgan Stanley were star performers in fixed income, with revenue growth of around 50%.
For all investment-banking firms, the trading of stocks, bonds, currencies and commodities for institutional investors has proved an important business at a time when fees from arranging deals and financing for corporations have dried up. UBS’s advisory and capital-markets revenue fell 57% year-on-year — similar to the drops seen among some of its US peers.
The Swiss bank stressed it is being deliberately selective in investment banking, particularly in the US, so the results shouldn’t have been too surprising. The firm is primarily a wealth manager, with other businesses retained to support that core franchise.
That stacks up strategically. Competing against the US firms means hefty ongoing investment; you’re either in the arms race or not. If not, you can’t thrive in all market conditions. But shareholders may need to be more cognizant of how different UBS is from its US peers.
The better news is that the firm made reassuring noises on the impact of the gummed-up leveraged-loans market, saying it registered mark-to-market losses here of only about $70 million in the period, with no material hits in the current quarter so far. The firm is also optimistic that it can meet its cost targets for this year, reminding investors — and doubtless employees — that bonus accruals fall with revenue. Return on attributed equity in the investment bank was 12% in the period, or 15% when adding back litigation charges. That’s an achievement in market conditions that don’t suit your business mix.
The share price fell 7% in the aftermath of the results. That was partly down to the disappointing trading performance but also softness in wealth management plus a mix of currency movements, the litigation charge and other one-off impacts that took the market by surprise. Of course, in some previous quarters, it has been the opposite story with UBS’s business mix helping it shine.
The stock trades just below book value, a premium to European peers but a discount to US rivals. UBS is still targeting a return on core capital of 15% to 18% this year. Hitting such numbers would ordinarily support a higher valuation. But UBS’s Achilles’ heel — inconsistency and unpredictability — may be getting in the way of earning it.

—Bloomberg