UBS Profit Misses Estimates, Hurt by Trading Revenue Slump

Is UBS Suffering From the 'Wrong Kind of Volatility'?
  • Investment-banking unit sees profit drop 67% in first quarter
  • UBS CEO Ermotti says enviroment remains `challenging'

UBS Group AG’s first-quarter profit missed analysts’ estimates, hurt by the weakest start to the year in investment banking since Chief Executive Officer Sergio Ermotti began to reshape that business four years ago.

Net income fell 64 percent to 707 million Swiss francs ($741 million) from a year earlier, the Zurich-based bank said on Tuesday. The investment bank, led by Andrea Orcel, posted the largest drop among global firms in fees from advising on mergers and underwriting stock and bond deals, and its 25 percent decline in trading revenue was worse than the average of that group.

Sergio Ermotti
Sergio Ermotti
Photographer: Simon Dawson/Bloomberg

Ermotti, 55, has cut thousands of jobs and scaled back the bank’s rates and credit businesses to focus on wealth management since taking over in 2011. While UBS shares have trailed this year’s declines in Deutsche Bank AG and Credit Suisse Group AG, the CEO signaled that earnings will remain under pressure amid a “challenging” environment.

“This shows that UBS -- like many of its peers -- has a fixed cost base that is too high for the kind of tough quarter we have seen,” said Chris Wheeler, a London-based analyst at Atlantic Equities. “To maintain a superior profitability through the good and bad cycles, they are going to have to address that.”

UBS shares dropped 7.5 percent to 15.29 francs in Zurich. They have tumbled about 22 percent this year, while Swiss rival Credit Suisse, which is following UBS in shrinking its securities business to focus on wealth management, has lost 36 percent.

Revenue slipped 23 percent to 6.8 billion francs in the first quarter, while the adjusted return on tangible equity, a measure of profitability, dropped to 8.5 percent from 14.4 percent. The bank is on track to cut costs by 1.4 billion francs by the end of June under a plan announced in 2014, as part of efforts to lower expenses by 2.1 billion francs in 2017.

Ermotti said the bank maintains its profitability target of 15 percent for 2017 and will be “in a better position” to update markets at the end of June. While UBS remains committed to grow its dividends, it’s “difficult” to asses the impact for the full year at this stage, he said.

‘Paralyzing Volatility’

“This cocktail of macro issues, geopolitical issues is now coming on,” the CEO said in an interview with Bloomberg Television’s Guy Johnson. “You see a lot of factors that may affect market sentiment -- and in that sense you might see volatility -- but it’s not the kind of volatility that is translating to client activity. It’s a paralyzing volatility.”

Europe’s largest lenders are seeking to weather a drop in securities revenue, hurt by market swings, record-low interest rates and tougher regulation. The five biggest U.S. investment banks saw their combined trading revenue drop 22 percent in the first quarter, while BNP Paribas SA said on Tuesday that revenue from trading fixed income, currencies and commodities slipped 13 percent.

At UBS, profit at the investment bank dropped 67 percent to 253 million francs, the lowest first-quarter total since 2009. Corporate client solutions, the part of the unit that helps clients issue debt and equity and advises on mergers and acquisitions, had a decline in revenues of 39 percent to 474 million francs.

The Swiss lender is seeking to expand in China, which became embroiled in a market turmoil in the first quarter, making it more vulnerable than peers that are largely focused on their home markets.

‘New Territory’

“We definitely entered into a kind of new territory in the first quarter,” Ermotti said. “The first quarter was an environment that had only one constant -- risk aversion from January 1 until the end of the quarter.”

The wealth management division, led by Juerg Zeltner, reported a pretax profit of 557 million francs, down from 951 million francs a year earlier as the bank had “the lowest transaction volumes recorded for a first quarter” at the unit. The unit’s profit fell short of the 682 million-franc average estimate of six analysts compiled by Bloomberg News.

“The outlook wording sounds a bit more cautious than usual,” said Tomasz Grzelak, a Zurich-based analyst at MainFirst, with a neutral recommendation on UBS shares. “The soft start of the financial markets into 2016 continues to bode ill for both the wealth-management unit as well as the investment-banking division.”

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Is UBS Suffering From the 'Wrong Kind of Volatility'?

Net Outflows

Wealth management attracted 15.5 billion francs in net new money in the first quarter, reversing 3.4 billion in outflows in the previous quarter and making for annualized growth of 6.5 percent. While that’s above UBS’s target of 3 percent to 5 percent, Ermotti said that the bank expects “more moderate growth” in the rest of the year.

Asset management saw net outflows of 5.9 billion francs, with one client pulling 7.2 billion francs over pricing. The unit’s pretax profit almost halved to 90 million francs.

“The very good net new money development is the bright spot in the first quarter after two weak quarters,” said Andreas Brun, an analyst at Zuercher Kantonalbank in Zurich, who has a market perform recommendation on UBS shares.

The bank’s CET1 ratio, a measure of financial strength, dropped to 14 percent at the end of March, from 14.5 percent three months previously, following an increase in risk-weighted assets. The leverage ratio increased to 5.4 percent from 5.3 percent.

“UBS earnings are sensitive to broader market headwinds, but the company is doing its best to offset this through ongoing cost saves,” Andrew Coombs, an analyst at Citigroup Inc. with a buy recommendation on the shares, said in a note on Tuesday. “We believe today’s share price reaction is overdone and see this as a buying opportunity.”

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