UBS Investors Left Wanting More After Targets Underwhelm

(Bloomberg) -- UBS Group AG announced its first share buyback since the credit crisis and laid out fresh financial targets. Investors were unimpressed.

The stock fell the most since July after the Zurich-based bank set less ambitious goals for profitability, costs and net new money than some analysts had anticipated. What’s more, the plan to repurchase 2 billion Swiss francs of shares ($2.1 billion) over three years fell short of key U.S. rivals.

“Morgan Stanley is buying back up to $5 billion a year, Goldman is buying back $5 billion to $6 billion -- in that light 2 billion francs over three years is underwhelming,” said Piers Brown, an analyst at Macquarie Bank Ltd. “They can’t do much more given their capital levels.”

During more than six years as chief executive officer, Sergio Ermotti accelerated a push into wealth management, scaled back the investment bank and met tougher capital requirements. He also boosted dividends and stoked expectations for increased shareholder payouts. While Ermotti described Monday’s announcements as an “upgrade” of his strategy rather than a “reboot,” investors treated it more like a downgrade. 

Analyst Grilling

He and Chief Financial Officer Kirt Gardner faced a grilling on a call with analysts who repeatedly asked why the new goals weren’t more aggressive. Ermotti defended the targets as ambitious, realistic and achievable considering the current lack of macroeconomic and geopolitical visibility. The muted reception was perhaps the more surprising because the bank had approached investors and analysts in recent weeks to gauge whether to give a more formal strategic update, people with knowledge of the matter said last week.

UBS committed to increasing the dividend each year, by mid-to-high single-digit percentages, compared with a previous target to return at least half of profit to shareholders providing its capital ratio remains above 13 percent. Gardner also indicated buybacks could exceed the 2 billion-franc figure, capital permitting.

“The word buyback will probably excite a number of people, but it is a small buyback,” Neil Smith, an analyst at Bankhaus Lampe, said by telephone.

UBS has reduced trading activities since the financial crisis to free up funds to comply with stricter capital requirements. The bank now has more certainty on regulatory and legal issues after European rulemakers decided on global capital standards in December. The lender has a CET1 ratio of 13.8 percent and said it plans to operate with the key metric of financial strength at around 13 percent.

Wealth Combination

UBS also said it will combine its international and Americas wealth management businesses, and appointed Martin Blessing and Tom Naratil as co-presidents of the combined division, to be known as global wealth management. That puts two potential successors to Ermotti at the top of the bank’s most important unit, responsible for the bulk of pre-tax profit. The merger follows the appointment of former Commerzbank AG CEO Blessing to lead the international wealth unit after Juerg Zeltner announced his departure in December.

Some of the bank’s key businesses underperformed in the fourth quarter, including wealth management and the investment bank.

“Overall, UBS operating profit in the fourth quarter did not meet the market’s expectations,” Andreas Brun, a Mirabaud analyst, wrote in a note to investors.

The bank booked a 2.2 billion-franc net loss in the quarter because of a change in the U.S. tax code which caused it to take a charge of 2.9 billion francs. Banks including Citigroup Inc., Deutsche Bank AG and Credit Suisse Group AG also all disclosed one-time charges.

Changes in Key Targets:
Group Level:

• Approx. 15% RoTE excluding DTAs vs Higher than 15% RoTE
• Cost to income ratio below 75% vs Adjusted cost to income 60-70%

Wealth Management:

• 2%-4% net new money annual growth rate vs 3%-5% for wealth management and 2%-4% for wealth management Americas

Asset Management:

• Approx. 10% of pre-tax profit growth vs 1 billion francs adjusted pre-tax profit over the medium term

To contact the reporters on this story: Patrick Winters in Zurich at pwinters3@bloomberg.net, Jan-Henrik Förster in Zurich at jforster20@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Frank Connelly, Christian Baumgaertel

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