UBS reports drop in wealth profit as Ermotti lowers costs

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UBS Group AG Chief Executive Officer Sergio Ermotti pledged to continue cost cuts after profit at the wealth-management business fell and the securities unit was hurt by a slump in equities trading.

Pretax profit rose 11 percent to 877 million Swiss francs ($883 million) from 788 million francs a year earlier on lower expenses, the Zurich-based bank said in a statement Friday. That compares with the 862 million-franc average of six analyst estimates compiled by Bloomberg.

Ermotti, 56, has been forced to deepen cost cuts and scrap some profitability goals as negative interest rates, faltering emerging markets and clients’ unwillingness to trade undermined earnings. While a rebound in fixed-income trading boosted third-quarter revenue at BNP Paribas SA and Deutsche Bank AG, UBS made wealth management the focus of its strategy in 2012.

Wealth management has “come right back into the fold in terms of being a focus of cutting costs as we’re seeing in most banks around the world as they grapple with very low levels of revenue,” Chris Wheeler, an analyst at Atlantic Equities, told Bloomberg Television.

UBS swung between gains and losses, with the shares up 2.2 percent at 14.23 francs at 1:51 p.m. in Zurich. They have dropped about 27 percent this year, while Swiss rival Credit Suisse Group AG lost 36 percent of its market value.

Revenue fell 2 percent to 7.03 billion francs, while the cost-to-income ratio was at 88 percent, down from 89 percent. Net income declined 60 percent to 827 million francs on lower tax gains, missing analyst estimates.

UBS in July scrapped its near-term guidance for an annual adjusted return on tangible equity, a measure of profitability, as well as the adjusted cost-to-income ratio, having missed both of them in the second quarter. In the three months through September, the ROTE measure was 10.1 percent on an annualized basis, below the 15 percent the bank wants to achieve over the cycle.

Ermotti, who took over in 2011, is seeking to lower costs by 2.1 billion francs through 2017. The target doesn’t include the effects from exiting businesses or “any reduction of cost due to variable compensation that is driven by financial performance,” the CEO told Bloomberg TV on Friday, without elaborating.

“It’s a fairly demanding task that we have in front of us,” Ermotti said. “Our wealth-management businesses both in the U.S. and internationally have been going through a comprehensive cost-reduction program. You start to see the benefit as we speak.”

UBS had restructuring costs of 444 million francs, up from 298 million francs a year earlier, with the bank forecasting charges to remain at around the same level through 2017. Chief Financial Officer Kirt Gardner said on a call on Friday that restructuring costs may exceed the 3 billion francs initially estimated, partly because of “substantially higher regulatory expenses,” with 2.3 billion francs already realized since the beginning of 2015.

“It’s a cost beat so management is doing the right thing in terms of being proactive,” Chirantan Barua, an analyst at Bernstein with an underperform rating on the stock. However, “you see a fundamental income problem shaping up for UBS — margins are still down and the investment bank has underperformed peers.”

While larger rivals benefited from a rebound in fixed-income trading, UBS retreated from large parts of investment banking under Ermotti, seeking a less risky source of income. The securities unit, led by Andrea Orcel, reported a 68 percent drop in pretax profit to 161 million francs, hurt by a 16 percent slump in income from equities trading. Revenue from trading bonds and currencies increased 5 percent to 469 million francs.

The five largest U.S. investment banks saw their combined equity trading revenues drop 4.8 percent in the quarter, while revenue from trading in fixed income securities rose 49 percent. BNP Paribas on Friday reported a 41 percent surge in debt-trading revenue, a day after both Deutsche Bank and Barclays Plc beat analysts’ estimates in that business.

The corporate client solutions business, which advises companies on mergers as well as stock and bond sales, reported a 25 percent drop in revenue in the period.

UBS said it could be fined and suspended from arranging Hong Kong initial public offerings as the city’s securities regulator moves to punish the lender for its work on some IPOs. The action could result in “financial ramifications” including fines and restitution orders, it said.

Capital Buffer

The wealth-management division, led by Juerg Zeltner, reported a 21 percent decline in pretax profit to 504 million francs, missing the 580 million-franc estimate of analysts at Citigroup Inc. The unit reported net new money of 9.4 billion francs, up from 6 billion francs in the second quarter, driven by the Asia-Pacific region and Europe.

Swiss lenders have been under pressure to boost their capital buffers after the bailout of UBS during the global financial crisis prompted regulators to toughen scrutiny. The bank’s CET1 ratio, a measure of financial strength, fell to 14 percent from 14.2 percent at the end of June. The leverage ratio was 3.45 percent, up from 3.4 percent three months earlier.

Dividend Plans

UBS increased provisions for the U.S. investigation of its mortgage securities business by $417 million to $1.41 billion. Deutsche Bank disclosed last month that the Justice Department is asking it to pay $14 billion to settle a similar probe. The German lender doesn’t disclose provisions for single legal actions.

Ermotti said volatile market conditions, negative interest rates and tougher capital requirements will remain among the “headwinds.” Still, the lender plans to pay out a dividend of 60 cents per share for 2016, he said.

“The final determination is done in January,” the CEO said in the interview. “Our focus is to reconfirm our baseline dividend of 60 centimes per share for 2016 and we work on that.”

By Jeffrey Voegeli and Nicholas Comfort (Bloomberg)