UBS Q3 Profit Beats On Investment Banking

by Ike Obudulu Posted on October 25th, 2018

Swiss banking giant UBS Group AG (UBS) on Thursday reported significant growth in its third-quarter earnings mainly on the strength of Investment Bank results. The company also reaffirmed its strategy and ambitions, and outlined plans for profit growth by 2021.

UBS delivered strong third-quarter results with reported profit before tax (PBT) up 37% year over year (YoY) to CHF 1,668m and adjusted PBT up 15% to CHF 1,733m. Cost/income ratio of 77% was down 6 percentage points YoY; on an adjusted basis, it was down 3 percentage points to 76%. Net profit attributable to shareholders was CHF 1,246m, up 32% from the third quarter of 2017. Adjusted return on tangible equity (RoTE) excluding DTAs3 was 15.7% for the quarter, a 2.4 percentage point increase YoY.

Global Wealth Management’s PBT increased by 3% YoY to CHF 932m, with income and expenses both increasing by 2%. Recurring net fee income and net interest income both increased YoY on a new high for invested assets, further progress on mandate penetration, as well as increased net interest margin on deposits and higher loan volumes, while transaction-based revenues declined on lower client activity. Personal & Corporate Banking PBT was CHF 413m, as growth in recurring net fee income offset the ongoing pressure from the negative interest rate environment; net new business volume growth remained strong. Asset Management reported PBT of CHF 120m, as the positive effects of higher invested assets partly offset the impact of a prior-period business sale and pressure on margins; invested assets rose to CHF 815bn, the highest in a decade. The Investment Bank delivered PBT of CHF 472m and an adjusted return on attributed equity of 21%, on strong revenue growth in Equities and Foreign Exchange, Rates and Credit (FRC) and continued resource discipline.

During the third quarter, UBS repurchased CHF 100m of its own shares, taking total purchases to CHF 650m for this year, above the 2018 target of CHF 550m. UBS’s capital position remains strong, with a CET1 capital ratio of 13.5%, a CET1 leverage ratio of 3.80%, a tier 1 (going concern) leverage ratio of 5.0%, and total loss-absorbing capacity of over CHF 80bn.

The bank expects to grow revenues at least as fast as real GDP growth, while delivering positive operating leverage.

The company said it will intensify its focus on delivering growth with further emphasis on capital and cost efficiency.

UBS said it remains strongly positioned to benefit from positive long-term secular growth trends, including global wealth creation and economic expansion in Asia Pacific.

The company reaffirmed its plan to deliver 10-15% pre-tax profit growth over the cycle in its Global Wealth Management business division.

UBS’s ambition is to grow profits at the upper end of the target range over the 2019-2021 period. The business division will also target net new money growth of 2-4% per annum while aiming for at least 3% growth by 2021.

The bank targets to grow its ordinary dividend per share at mid-to-high single digit percent per annum. The bank expects to return excess capital, after dividend accruals, likely in the form of share repurchases after considering its outlook and subject to regulatory approval.

Over the period, UBS expects to keep costs broadly flat, excluding performance-driven variable compensation, while funding significant investments for growth.

Further, the company said Edmund Koh and Markus Ronner will join Group Executive Board of UBS, while Kathy Shih will retire at year-end.

Koh will take over as President UBS Asia Pacific and join the Group Executive Board of UBS Group AG effective January 1,2019, following the decision of Shih to retire after 32 years at UBS.

Ronner will join the Group Executive Board of UBS Group AG effective November 1, 2018 as Head of Group Compliance, Regulatory and Governance.

Looking ahead, the company noted that ongoing geopolitical tensions, rising protectionism and trade disputes have further dampened investor sentiment and confidence. The company sees these trends to continue to impact Global Wealth Management clients’ transaction activity in the fourth quarter; however, moderately increased levels of volatility and volumes are generally positive for institutional business in the Investment Bank.

Switzerland’s biggest bank, which manages the money of half the world’s billionaires, said on Thursday it aims to bring in 70 billion Swiss francs ($70 billion) in new inflows from the United States over the next three years.

With more billionaires hailing from the United States than anywhere else in the world, Swiss money managers have started courting wealthy Americans who might be seeking to invest some of their cash abroad.

The new targets from UBS come as geopolitical jitters and trade tensions have put pressure on its main business, with its wealth management division suffering from clients trading less.

But UBS posted a surprise 32 percent rise in overall third-quarter net profit after a 75 percent jump in investment banking pre-tax profit and strong business in the Americas offset modest growth in the wealth management division and flat earnings in its home market and Europe, Middle East and Africa region.

Facing a highly competitive and largely saturated Swiss wealth management market and sluggish growth prospects in Europe, UBS said it planned to expand in the United States.

It aims for pre-tax profit growth at the upper end of the unit’s 10-15 percent target over 2019-2021, while it brings in fresh money at a 2-4 percent annual rate.

“Expansion in the American ultra-high net worth segment alone is expected to contribute significant net new money over the next three years,” UBS said in a statement.

It also wants to deliver a pre-tax profit margin of 25 percent in the United States by 2021, marking a 900 basis point rise from the 16 percent it posted in the third quarter.

Wealth management co-heads Martin Blessing and Tom Naratil are scheduled to provide details on the plans at 1300 GMT.

Although UBS again outperformed expectations at its investment bank, analysts and investors have been cautious about welcoming gains in a business seen as more volatile and outside the Zurich-based bank’s core focus.

Over the last decade, the bank has scaled back its capital-intensive investment bank to focus more on banking the world’s rich. It says the business is essential to fully servicing wealth management clients, focusing on profitable advisory and execution niches that use up less of the balance sheet.

UBS outlined few major changes for its investment bank, after former boss Andrea Orcel left to head Spain’s biggest bank Santander (SAN.MC) in September. It is now run by co-heads Piero Novelli and Robert Karofsk, who are scheduled to provide further details shortly after 1500 GMT.

In Switzerland, UBS shares were trading at 13.58 francs, up 2.53 percent. In pre-market activity on the NYSE, shares were trading at $13.59, up 2.9 percent.

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