UBS Group AG fell the most since September after the bank pushed back profitability targets for the third time in two years and warned of “substantial additional costs” stemming from new capital rules.
While third-quarter profit beat analyst estimates on one-time gains, income from managing money for the rich declined, the bank said on Tuesday, and UBS added fewer funds than forecast. Switzerland’s biggest bank is reorganizing management and named Kirt Gardner the new chief financial officer, replacing Tom Naratil who is taking a role in wealth management, the bank also said.
Three years into his strategic overhaul of the firm, Chief Executive Officer Sergio Ermotti is grappling with stricter capital rules at home and a deterioration of the economic outlook in regions in which it’s seeking to expand. Growing buffers against financial shocks may leave less available to shareholders just as the firm has started increasing dividends.
“The push-out on profitability is not helpful for dividend growth,” said Martin Moeller, who manages about 2.2 billion Swiss francs ($2.2 billion) in equities at Union Bancaire Privee. “Although this is not a massive cut to earnings, UBS will not be the capital return story people want to see.”
The shares fell 4.3 percent to 19.17 francs, paring this year’s gain to 12 percent.
The bank delayed its goal of returning 15 percent on tangible equity by a year, citing the economic outlook and the increased cost of regulation. Under Swiss rules announced last month, UBS and Credit Suisse Group AG will need to have a leverage ratio of 5 percent. To comply they will have to issue costly debt, causing substantial incremental cost, Naratil told analysts.
UBS also increased its target for total risk-weighted assets to 250 billion francs from 200 billion francs, signaling capital will have to rise. The current tally stands at 216 billion francs. Deutsche Bank AG and Credit Suisse said last month they expect risk-weighted assets to increase as regulators apply more charges and change the way risk is calculated.
“Higher regulatory requirements mean capital ratios won’t rise as quickly as expected,” Andreas Brun, an analyst at Zuercher Kantonalbank said in a note. Expectations for the bank’s payout that are too high will have to come down, he said.
Net income rose to 2.07 billion francs in the three months through September from 762 million francs a year ago, UBS said. That exceeded the 1.73 billion-franc average estimate of six analysts surveyed by Bloomberg. UBS was able to claim a tax credit of 1.3 billion francs against earlier losses, mainly in the U.S.
“This was a very very challenging quarter,” Ermotti said in an interview Tuesday with Bloomberg TV. “Big changes in the sentiment in emerging markets, big changes in China, big changes on the geopolitical front.”
In wealth management, where the bank makes most of its money, trading dropped to its lowest level in four years as clients sat out the worst quarter for global stocks since 2011. Pretax income from the division fell 9.6 percent to 639 million francs. Analysts surveyed by Bloomberg estimated 691 million francs.
Net new money in wealth management totaled 200 million francs, down from 1.8 billion the previous quarter, the lowest in at least four years. UBS asked clients to hold less cash or go elsewhere and excluding the effect of that program net new money was of 3.5 billion francs, compared to 9.8 billion a year earlier. Clients in Asia cut borrowings by “unusually high” amounts, the bank said.
“Today’s results will be viewed slightly negatively,” said Brun, the Zuercher Kantonalbank analyst. “This is because net new money growth is lower than expected” and the turbulence in Asia also weighed on the business.
The regulation will mean “lower return for shareholders,” Ermotti said. There will also be an impact on jobs, costs and ultimately on taxpayers, he said, “because we are going to make less money and we will pay less taxes.”
In the management reorganization, Gardner, who is currently CFO for wealth management, will take on the new post effective Jan. 1, UBS said in a statement. Naratil will take over from Robert McCann as president of UBS Americas and Wealth Management Americas, while Philip Lofts, group chief risk officer, is stepping down from his role and will be replaced by Christian Bluhm, who joins from FMS Wertmanagement, UBS said.