UBS share buyback leaves investors underwhelmed

Bloomberg

UBS Group AG investors were left underwhelmed by the bank’s first share buyback since the credit crisis and rejigged financial targets.
The stock declined the most since July after the Zurich-based bank downgraded a key profitability target, as well as paring back forecasts for its asset-
management business and net new money at its combined wealth-management unit. The bank also said it would repurchase as much as 2 billion Swiss francs of shares ($2.1 billion) over three years.
Now in his seventh year as Chief Executive Officer, Sergio Ermotti has accelerated a push into wealth management, boosting capital levels and profitability and stoking demands for higher returns and targets. The bank approached investors and analysts in recent weeks to gauge whether to give a more formal strategic update, people with knowledge of the matter said last week, with Ermotti signaling in recent months the potential for a buyback.
“Morgan Stanley is buying back up to $5 billion a year, Goldman is buying back $5-6 billion — in that light two billion francs over three years is underwhelming,” said Piers Brown, an analyst at Macquarie Bank Ltd. “They can’t do much more given their capital levels and there is also outstanding litigation risk; the return on equity is a definite downgrade.”
In addition to the buyback and slight downgrade of ROTE targets, Ermotti and Chief Financial Officer Kirt Gardner faced a grilling on a call with analysts about why the new targets — from group profitability to costs to net new money — weren’t more aggressive. Ermotti defended the goals as ambitious, realistic and achievable considering the lack of clarity from a macroeconomic and geopolitical point of view.
UBS is also combining its international and Americas wealth management businesses, with Martin Blessing and Tom Naratil appointed as as co-presidents of a new combined business to be known as Global Wealth Management. That puts two potential successors to Ermotti at the top of the bank’s most important unit, responsible for the bulk
of pre-tax profit. The merger
follows the appointment of former Commerzbank AG CEO Blessing to lead the international wealth unit after Juerg Zeltner announced his departure in December.
UBS has scaled back trading activities since the financial crisis to free up funds to comply with tougher rules on loss-absorbing capacity. The bank now has more certainty on regulation and legacy legal issues after European regulators in December decided on global capital standards. The lender has a CET1 ratio — a key metric of financial strength — of 13.8 percent and said it intends to operate with that at 13 percent.
Some of the bank’s key businesses also underperformed in the fourth quarter, including the wealth management business and investment bank. “Overall, UBS operating profit in the fourth quarter did not meet the market’s expectations,” Andreas Brun, a Mirabaud analyst, wrote in a note to investors.
UBS committed to growing the dividend by mid-to-high single digit percentages per year, compared with a target of returning at least half of profit to shareholders providing its capital ratio remains above 13 percent. Gardner also indicated buybacks could exceed the 2 billion franc figure, capital permitting.
“The word buyback will probably excite a number of people but it is a small buyback,” Neil Smith, an analyst at Bankhaus Lampe, said by telephone.
The bank booked a 2.2 billion-franc net loss in the fourth quarter because of a change in the US tax code which caused it to take a charge of 2.9 billion francs. Banks including Citigroup Inc., Deutsche Bank AG and Credit Suisse Group AG also all disclosed one-time charges.