UBS’s chief sees hurdles multiplying after rebound

Bloomberg

UBS Group AG rebounded from one of the worst environments in recent history, but CEO Sergio Ermotti is still facing no shortage of challenges.
Pressure on investment banking revenue, the prospect of fresh rate cuts and the struggle to meet profit targets are all weighing on the bank after it posted the best quarterly net income in almost a decade. Clients also pulled $1.7 billion from the key wealth management unit, where earnings were lower than expected, and income from lending also slumped.
The bank relied on cost cuts and rising income from advising clients on deals and stock issuance to compensate for earnings disappointment at its most important private banking business, which contended with wealthy clients withdrawing funds to pay tax bills. Overall, $1.7 billion left the unit in a quarter traditionally impacted by US tax-related outflows, compared with $1.2 billion a year earlier. The pace of global growth, the bank said, has also stabilised at a lower level.
“The outlook is vague and points to uncertain macro-
economic conditions,” Javier Lodeiro, an analyst at ZuercherKantonalbank, said in a note to clients. “Global wealth management disappointed.”
At the investment bank, trading revenue roughly held up with US peers, with equities trading down 9 percent and fixed income trading 7 percent lower. The standout was at the main advisory business, where revenue gained about 18 percent as the bank advised on large global deals, including the spinoff of contact lens maker Alcon Inc from Novartis AG.
“The performance we had in the second quarter is a strong one, but that doesn’t make us complacent about the environment,” Ermotti said in a Bloomberg TV interview. “It’s quite clear that if I look at for example the investment bank activities, the revenue pressure is there to stay in the industry.”
UBS shares rose 1.8 percent to 12.03 francs in Zurich trading. The stock has gained 3.6 percent this year, compared with a 17 percent increase for local rival Credit Suisse Group AG.
Investor Discontent
UBS is seeking to rebound from a slew of bad news of late, ranging from investor discontent with strategy to the departure of its former investment bank head and a $5 billion penalty in a French tax case. That’s left the stock trailing recent gains at rivals this year and Ermotti working to regain his footing.
Profit before tax in wealth management missed analyst estimates as competition drove down revenues from loans to wealthy clients, even as the bank added new money in most regions. Net interest income, which tracks the money made from loans and deposits, declined by $75 million compared with a year earlier, in a trend flagged last week by US rivals.
Ermotti joined Wall Street peers warning that income from lending will come under more pressure after a sudden reversal in expectations for interest rates globally. Earlier this year, he surprised investors by describing conditions in the first quarter as some of the worst in recent years.