UBS Group AG said first-quarter profit dropped 64 percent, missing analyst estimates, as market turbulence eroded earnings at the wealth-management and securities units. The shares plunged.
Net income declined to 707 million Swiss francs ($741 million) from 1.98 billion francs a year earlier, the Zurich-based bank said on Tuesday. That fell short of the 735 million-franc average estimate of five analysts in a Bloomberg survey. At the investment-banking unit, led by Andrea Orcel, profit slumped 67 percent to 253 million francs in that period.
Chief Executive Officer Sergio Ermotti, 55, who has shifted the bankâ€™s focus away from investment banking in favor of wealth management, is struggling with market volatility that led to a slump in trading across the firm. While there have been some signs of improvement, economic challenges and geopolitical risks mean clients are avoiding risks and thatâ€™s â€œunlikely to be resolved in the foreseeable future,â€ the lender said.
â€œWe definitely entered into a kind of new territory in the first quarter,â€ Ermotti said in an interview with Bloomberg Televisionâ€™s Guy Johnson. â€œThe first quarter was an environment that had only one constant â€” risk aversion from January 1 until the end of the quarter.â€
UBS shares dropped as much as 6.7 percent and traded at 15.51 francs in Zurich, down 6.2 percent. They have tumbled about 21 percent this year, while Swiss rival Credit Suisse Group AG, which is shrinking its securities business to focus on wealth management, has lost 34 percent.
Revenue slipped 23 percent to 6.8 billion francs in the first quarter from a year ago, while the adjusted return on tangible equity, a measure of profitability, dropped to 8.5 percent from 14.4 percent. Ermotti said the bank maintains its 15 percent target for 2017 and will be â€œin a better positionâ€ to update markets at the end of June.
While UBS remains committed to grow its dividends, Ermotti said on a call with analysts that itâ€™s â€œdifficultâ€ to asses the impact for the full year at this stage.
â€œThis cocktail of macro issues, geopolitical issues is now coming on,â€ Ermotti said. â€œYou see a lot of factors that may affect market sentiment â€” and in that sense you might see volatility â€” but itâ€™s not the kind of volatility that is translating to client activity. Itâ€™s a paralyzing volatility.â€
Europeâ€™s largest lenders are seeking to weather a drop in securities revenue, hurt by market swings, record-low interest rates and tougher regulation. The five biggest U.S. investment banks saw their combined trading revenue drop 22 percent in the first quarter, while BNP Paribas SA said on Tuesday that revenue from trading fixed income, currencies and commodities slipped 13 percent.
At UBS, the profit drop at the investment bank missed analystsâ€™ estimates of 396 million francs. Corporate client solutions, the part of the unit that helps clients issue debt and equity and advises on mergers and acquisitions, had a decline in revenues of 39 percent to 474 million francs in the first quarter. Investor client services, which houses the trading business, had a drop in revenue of 25 percent to 1.4 billion francs. The wealth management division reported a pretax profit of 557 million francs, down from 951 million francs a year earlier.
as the bank had â€œthe lowest transaction volumes recorded for a first quarterâ€ at the unit. The unitâ€™s profit fell short of the 682 million-franc average estimate of six analysts compiled by Bloomberg News.
â€œThe outlook wording sounds a bit more cautious than usual,â€ said Tomasz Grzelak, a Zurich-based analyst at MainFirst, with a neutral recommendation on UBS shares. â€œThe soft start of the financial markets into 2016 continues to bode ill for both the wealth-management unit as well as the investment-banking division.â€
Wealth management attracted 15.5 billion francs in net new money in the first quarter, reversing 3.4 billion in outflows in the previous quarter and making for annualized growth of 6.5 percent. While thatâ€™s above UBSâ€™s target of 3 percent to 5 percent, Ermotti said that the bank expects â€œmore moderate growthâ€ in the rest of the year.
Asset management saw net outflows of 5.9 billion francs, with one client pulling 7.2 billion francs over pricing. The unitâ€™s pretax profit almost halved to 90 million francs.
â€œThe very good net new money development is the bright spot in the first quarter after two weak quarters,â€ said Andreas Brun, an analyst at Zuercher Kantonalbank in Zurich, who has a market perform recommendation on UBS shares.
The bankâ€™s CET1 ratio, a measure of financial strength, dropped to 14 percent at the end of March, from 14.5 percent three months previously, following a 6 billion-franc increase in risk-weighted assets. The leverage ratio increased to 5.4 percent from 5.3 percent.
UBS said itâ€™s on track to cut costs by 1.4 billion francs by the end of June under a plan announced in 2014, as part of efforts to lower expenses by 2.1 billion francs by 2017.
â€œThereâ€™s nothing you can do short-term to offset such a headwind,â€ Ermotti said in the interview. â€œWeâ€™ve been working on our cost-reduction initiatives. You work on structural issues mainly front to back â€” improving efficiencies, improving processes and positioning the business to be ready for a more normalized environment.â€