UBS’s freshly-combined global wealth management disappoints

Bloomberg

UBS Group AG’s freshly-combined wealth management unit didn’t get off to the best start. The business, which accounts for about half UBS’s pre-tax profits, posted first-quarter earnings that missed analyst estimates. That disappointment and lower-than-expected asset management results eclipsed a star performance at the investment bank, sending the shares down the most in three months.
Chief Executive Officer Sergio Ermotti has spent much of his tenure refocussing the bank on wealth management, shrinking investment-banking businesses including fixed-income trading.
The bank is seeking to boost efficiency and growth by combining the two wealth management businesses into a single one known as Global Wealth Management, appointing Martin Blessing and Tom Naratil as co-heads of the business.
‘DOWNGRADE RISKS’
“First quarter results are disappointing across all divisions except investment banking and we do not expect consensus to upgrade but potentially see risks of downgrades,” Kian Abouhossein, a analyst at JPMorgan Chase & Co. said in a note to clients.
UBS shares fell as much as 4.4 percent, the most since late January, and were trading 2.7 percent lower as of 11:15 am in Zurich. Profit before tax at wealth management was 1.1 billion Swiss francs, just under the company-compiled estimates of 1.2 billion francs. Net new money of 19 billion francs was slightly less than the year-earlier number, though in line with the bank’s own targets.
“The wealth business looks a little bit on the weak side to be honest,” said Piers Brown, an analyst at Macquarie Bank Ltd. “Although net new money is strong, the margin looks a bit weaker.”
INVESTMENT BANK
The investment bank posted pretax profit of 589 million francs, the Zurich-based bank said in an statement, beating the average estimate for 463 million francs in a company-compiled survey of 24 analysts.
Revenue from equities trading as well as advising on mergers, IPOs and debt issuance helped fuel gains at the investment bank, with UBS saying that excluding currency effects the results would have been even stronger. The bank gave a mixed outlook for the second quarter, saying US interest rate rises will support dollar income and that there’s good momentum in the business even as some funding costs rise and volatility is muted.
Asked about a Bloomberg story that referenced ongoing internal debates about the investment bank, Ermotti said in an interview with Bloomberg TV that it’s “very difficult to see the merit” of those reports. Ermotti rejigged the bank’s targets earlier this year, committing to buy back as much as 2 billion francs of stock over three years. The buyback will start in the second quarter, UBS said. It’s also targeting 2 to 4 percent growth in net new money for global wealth management and a cost to
income ratio of under 75 percent for the group.
Ermotti is shifting UBS into expansion mode and returning capital to shareholders after merging the bank’s two wealth management units. The Swiss bank, which has increasingly focussed on banking for rich clients, is prioritising growth in the US and Asia where it expects the wealth of ultra-high net worth individuals to increase quicker than elsewhere.
In the second quarter, funding costs will be higher related to long-term debt and capital instruments, while the bank also cautioned that market volatility remains muted. UBS’s CET1 ratio — a key factor of financial strength — dropped to 13.1 percent in the first quarter, below company-compiled estimates for 13.3 percent.
The investment bank now generates most of its income from equities, dealmaking and underwriting and benefited from a return to volatility in the first quarter, though Ermotti warned in a Bloomberg TV interview that client activity was more muted in February and March.
Ermotti said earlier this year the bank is considering reporting results in US dollars rather than Swiss francs to help avoid currency headwinds.