UBS gets a boost from wealthy Asians as investment bank trails

UBS Group AG got a boost from rich Asian clients in a quarter hit by a poor result at the investment bank and lower income from lending as interest rates have languished.

The key wealth management unit added $15.7-billion new money in the three months through September, most of that from Asia, helping lift assets overseen for the affluent to a record $2.5 trillion, UBS said last Tuesday. While profit beat analysts’ estimates, UBS said it will book a roughly $100-million charge in the fourth quarter to restructure the securities unit, and warned that lower interest rates will continue to squeeze income.

“Market conditions in the last few quarters have been very challenging,” CEO Sergio Ermotti said in an interview with Bloomberg TV. That’s particularly true for the investment bank, which is “much more skewed toward Europe and Asia” than the US.

Ermotti is seeking to turn the corner after a year marred by huge legal fines, questions about succession planning and a slump in the share price. In August, he shook up the management board, hiring former Credit Suisse Group AG banker Iqbal Khan to co-run the wealth management unit and positioning him as a potential successor. But Khan’s start at UBS was overshadowed by a spying scandal that exposed a deep rift with his former boss.

UBS was one of the first banks to pivot away from investment banking and toward wealth management after the financial crisis, becoming a model for rivals including Credit Suisse. Still, increasing competition for rich clients, negative interest rates and a slowing economy are putting pressure on that business. UBS said in August that it would expand a policy of charging affluent clients for excess cash holdings. Clients will start feeling the impact on November 1 when the policy comes into effect.

Trailing shares

UBS rose 2.1 percent at 9:06 a.m. in Zurich trading. Before today, shares of the lender had lost 6.5 percent this year, compared with a gain of 15 percent at Credit Suisse, where a three-year restructuring modeled on UBS’s pivot to private banking is beginning to bear fruit. To lift the stock, UBS has earmarked $2 billion for share buybacks through 2020. It is nearing its $1-billion target in buybacks this year.

“UBS continues to have the best wealth management franchise, best business mix in a new regulatory regime,” analysts Kian Abouhossein and Amit Ranjan at JPMorgan Chase & Co. wrote in a note. “Although the investment bank performance is relatively weak compared to US peers, we have to take into account” the geographic and business focus of the bank.

Global wealth management is by far the biggest of UBS’s units, contributing more than twice as much revenue and pretax profit last year as the investment bank. A prolonged period of low rates are eating into earnings from lending, with net interest income at the business declining about 3 percent from a year earlier, and recurring fee income falling as well.

The asset management unit, which caters to less wealthy investors and institutions, won $24.1 billion in long-term net inflows, a rare bright spot. Ermotti said Tuesday that he asked Khan to assess the wealth management franchise and, along with co-head Tom Naratil, report back to him with ideas to improve it by December.

Khan, in a memo to employees after he started this month, pointed to “unrealized potential” within the wealth management business. Key will be his take on developing UBS’s offering to wealthy clients in Asia, a region that wasn’t under his control at Credit Suisse and which attracted the bulk of the inflows last quarter.

Khan is running the business alongside Naratil, who focuses on the Americas. He joined under a cloud after it emerged that Credit Suisse had private investigators follow him to make sure he didn’t try to encourage others to defect. The scandal exploded onto the front pages of local tabloids and exposed a personal feud between Khan and his former boss, Tidjane Thiam. One of Thiam’s key lieutenants left the bank after he was found responsible for ordering the surveillance.

Trading unit

ERMOTTI is also making changes to the investment bank, reshuff ling senior management and combining trading operations in changes that may ultimately eliminate hundreds of positions, people with knowledge of the plan have said. The bank is cutting about 40 jobs in the AsiaPacific region as part of the shakeup, a person familiar with the matter has said.

The restructuring should save the bank about $90 million annually, Ermotti said in an interview with Bloomberg TV, adding that job losses won’t be significant.

Adjusted pretax profit at the unit fell 59 percent from a year earlier, as the bank earned less from advising on deals, as well as from trading. Equities trading revenue declined almost 7 percent, compared with a gain of about 1 percent at the five biggest Wall Street firms. UBS is seeking to boost collaboration between dealmakers and its wealthmanagement unit, while sharpening a focus on industries most of interest to its richest clients.

The bank has had a rocky year so far. It was dealt a $5-billion penalty in a French tax case in February that it intends to appeal. After warning of a difficult market in the first quarter, it announced $300 million in additional cost cuts. Ermotti previously signaled that the bank may struggle to reach its 15percent adjusted return on tangible equity capital, instead saying that the bank could achieve a level on par with last year’s 13-percent return.