UBS Beats Profit Estimates, CEO Pushes Ahead With Cost Cuts

Ermotti: UBS Operating in a `Challenging' Environment
  • Both wealth management and investment bank post profit drop
  • UBS on track to cut 2.1 billion francs in costs through 2017

UBS Group AG beat analysts’ second-quarter profit estimates and said it’s on track to cut costs by 2.1 billion Swiss francs ($2.2 billion) through 2017, with Chief Executive Officer Sergio Ermotti struggling with a slump at the wealth management and securities-trading units.

Net income slipped to 1.03 billion francs from 1.2 billion francs a year ago, the Zurich-based bank said in a statement Friday. That beat the 668 million-franc average of five analyst estimates compiled by Bloomberg. Pretax profit at the investment bank, led by Andrea Orcel, dropped 48 percent, while wealth management saw a 31 percent decrease.

Some of Europe’s largest banks have been hurt by volatile markets and record-low interest rates, with Deutsche Bank AG, Barclays Plc and Credit Suisse Group AG all reporting a drop in second-quarter earnings. While Ermotti, 56, has achieved more than half of his targeted cost cuts through 2017, he remained cautious on the outlook, saying there’s “very little visibility.”

“On the cost side, things appear to be moving forward,” said Andreas Venditti, an analyst at Vontobel with a buy recommendation on the shares. “The target is still far away, so if they make it that’s certainly going to be positive.”

UBS jumped 2.6 percent to 13.63 francs at 2:02 p.m. in Zurich. The shares have declined about 30 percent this year, while Credit Suisse and Deutsche Bank both lost almost half of their market value, partly hurt by a wider market selloff in the wake of the U.K.’s decision to exit the European Union.

UBS Guidance

UBS scrapped its guidance for an annual adjusted return on tangible equity and adjusted cost-to-income ratio after missing both of them in the second quarter. It reaffirmed a goal for a return on tangible equity of more than 15 percent and cost-to-income ratio of 60 percent to 70 percent in a “normalized” environment, having shaved off 1.4 billion francs in costs by the end of June as part of the 2017 target.

Switzerland’s biggest bank retreated from large parts of investment banking in late 2012, seeking a more stable, less risky source of income. UBS was the leader in private banking at the end of 2015, according to an annual study by London-based consulting firm Scorpio Partnership. Credit Suisse, led by Tidjane Thiam, is now pursuing a similar strategy, competing for super-rich clients in emerging markets like the Asia-Pacific region.

Revenue fell 5.3 percent to 7.4 billion francs, while the adjusted return on tangible equity was 10.1 percent, compared with a target of more than 15 percent. The cost-to-income ratio in the quarter was 80 percent, compared with 77 percent a year earlier.

The bank posted a gain of 123 million francs in its Swiss and wealth management units from the sale of a stake in Visa Europe Ltd. as well as a gain of 120 million francs from sales of real estate. The common equity Tier 1 ratio, a measure of financial strength, rose to 14.2 percent from 14 percent in the previous three months.

“It’s a challenging environment,” Ermotti told Manus Cranny in an interview on Bloomberg Television on Friday. “At this stage, our job is to try and find the right risk profile for clients. Many of them want to be extremely conservative.”

The wealth management division, led by Juerg Zeltner, reported a pretax profit of 518 million francs, down from 756 million francs a year earlier. Net new money at the division was 6 billion francs, down from 15.5 billion francs in the first quarter.

‘Under Pressure’

Net new money growth was 2.6 percent on an annualized basis, below the bank’s target of 3 percent to 5 percent. UBS cut the number of staff at the unit by 120, primarily reflecting ongoing cost reduction programs.

Clients’ cash holdings rose the highest since early 2014. Wealth management saw net new money outflows from emerging markets, a development set to continue next year, Chief Financial Officer Kirt Gardner said.

“UBS is a wealth manager and wealth management is under pressure,” said Chirantan Barua, an analyst at Bernstein with an underperform rating on the shares, adding that people are moving portfolio allocations towards cash. “Margins are down and net new money is a miss -- against their targets, the street’s targets.”

Profit at the investment bank dropped to 284 million francs from 551 million francs a year ago. While revenues in trading bonds and currencies rose 12 percent to 461 million francs, partly boosted by the British referendum on the EU. Revenue from trading equities dropped 22 percent, with income lower particularly in Asia Pacific, UBS said.

Job Cuts

The five largest U.S. investment banks saw their combined debt trading revenue rise 22 percent in the second quarter from a year earlier, according to data compiled by Bloomberg.

After thousands of job cuts in recent years, the investment bank workforce has reached the right size, Orcel has said. Earlier in the year, he removed some managers, citing the need to streamline operations. Investment Bank personnel decreased by 204 in the quarter, mainly driven by ongoing cost reduction programs, the bank said.

Corporate client solutions, the part of the unit that helps clients issue debt and equity and advises on mergers and acquisitions, saw revenue decline by 19 percent to 668 million francs, as the bank assisted fewer companies issuing shares or going public.

Asset management, led by Ulrich Koerner, posted a pretax profit of 114 million francs, down from 130 million francs a year ago, and showed net new money outflows of 7.7 billion francs after inflows of 9 billion francs in the year-earlier period.

UBS had $1.74 trillion under management at the end of 2015, according to an annual study by London-based consulting firm Scorpio Partnership. Bank of America was second with $1.44 trillion, while Morgan Stanley dropped one spot in the rankings to No. 3. Assets under management shrank at all three private banks.

“While gross margins are under pressure with the challenging environment, costs are feeling the competitive pressure of acquiring and retaining talent,” said Alison Williams, an analyst at Bloomberg Intelligence. “UBS is well positioned competitively but pressures from both sides are damping the profitability of the business.”

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