UBS Wealth Margins Slip as Customers Remain “Paralyzed”

Profit margins at UBS AG’s wealth business narrowed in the second quarter as turbulent financial markets curbed trading by its customers.

Gross margin, the revenue generated on client assets, dropped to 89 basis points in the second quarter from 97 basis points a year earlier at the firm’s unit for wealthy clients outside the U.S., UBS said today. A basis point is one one-hundredth of a percentage point.

“Today our clients are paralyzed by their fear of losing their wealth in these volatile markets,” Chief Executive Officer Sergio Ermotti told investors and reporters at a presentation in Zurich. “As a result they continue to increase their allocation to cash and other safe assets.”

The euro region’s sovereign-debt crisis and questions over the health of the European banking system continue to weigh on private clients’ confidence, damping market activity, UBS said. The bank doesn’t expect an improvement in customer behavior without progress in resolving those issues.

UBS is increasingly relying on wealth-management as it shrinks an investment bank that reported a second-quarter pretax loss today. Inflows across the wealth-management businesses totaled 13.2 billion francs ($13.5 billion) for the quarter, the highest since 2007. That boosted assets for wealthy clients worldwide to 1.54 trillion francs at the end of June.

Risk Appetite

“We only need to see a modest increase in risk appetite” to bring gross margins in wealth management ex-Americas back to the bottom of the firm’s target range of 95 basis points to 105 basis points, Ermotti said. An increase in interest rates will also benefit margins, the CEO said.

Wealth management outside the Americas reported 9.5 billion francs of net new assets for an annualized growth rate at the top of the firm’s 4.9 percent target range. Operating income slipped because of a decline in non-recurring fees and trading income, reflecting lower client activity levels.

Wealth Management Americas attracted 3.7 billion francs of net new money and increased pretax profit to a record $211 million, the firm said. Gross margin at that unit climbed 1 basis point from a year earlier to 79 basis points.

UBS, which posted the biggest loss in Swiss corporate history in 2008, saw net inflows resume in the third quarter of 2010 after customers pulled a net 233.7 billion francs in the 10 prior quarters.

Credit Suisse Group AG, the nation’s second-largest bank, and Julius Baer Group Ltd., the Zurich-based wealth manager established in 1890, have also reported weaker profitability. The gross margin at Credit Suisse slipped to 115 basis points from 119 basis points a year earlier and from 131 basis points in 2009.

Julius Baer

Customers of Julius Baer kept a “cautious investment stance” leading to “relatively restrained transaction and trading activity,” CEO Boris Collardi said last week. That pushed the bank’s gross margin down to 98 basis points in the first half of the year, from 104.9 basis points in the year-earlier period.

UBS targets growth in particular from ultra-wealthy clients with at least 50 billion francs in assets and from customers in emerging markets. Gross margin on invested assets was 53 basis points for the ultra-wealthy segment and 72 basis points for Asia-Pacific clients, UBS said in a financial report.

European clients outside Switzerland withdrew 100 million francs in the three months through June 30.

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