UBS CEO Ermotti Sees Hurdles Multiply After Emerging From Slump

(Bloomberg) -- UBS Group AG rebounded from one of the worst environments in recent history, but Chief Executive Officer Sergio Ermotti is still facing no shortage of challenges.

Pressure on investment banking revenue, the prospect of fresh rate cuts and the struggle to meet profit targets are all weighing on the bank after it posted the best quarterly net income in almost a decade. Clients also pulled $1.7 billion from the key wealth management unit, where earnings were lower than expected, and income from lending also slumped.

The bank relied on cost cuts and rising income from advising clients on deals and stock issuance to compensate for earnings disappointment at its most important private banking business, which contended with wealthy clients withdrawing funds to pay tax bills. Overall, $1.7 billion left the unit in a quarter traditionally impacted by U.S. tax-related outflows, compared with $1.2 billion a year earlier. The pace of global growth, the bank said, has also stabilized at a lower level.

“The outlook is vague and points to uncertain macro-economic conditions," Javier Lodeiro, an analyst at Zuercher Kantonalbank, said in a note to clients. “Global wealth management disappointed.”

At the investment bank, trading revenue roughly held up with U.S. peers, with equities trading down 9% and fixed income trading 7% lower. The standout was at the main advisory business, where revenue gained about 18% as the bank advised on large global deals, including the spinoff of contact lens maker Alcon Inc. from Novartis AG.

“The performance we had in the second quarter is a strong one, but that doesn’t make us complacent about the environment,” Ermotti said in a Bloomberg TV interview. “It’s quite clear that if I look at for example the investment bank activities, the revenue pressure is there to stay in the industry.”

UBS shares rose 1.8% to 12.03 francs as of 11:30 a.m. in Zurich trading. The stock has gained 3.6% this year, compared with a 17% increase for local rival Credit Suisse Group AG.

Investor Discontent

UBS is seeking to rebound from a slew of bad news of late, ranging from investor discontent with strategy to the departure of its former investment bank head and a $5 billion penalty in a French tax case. That’s left the stock trailing recent gains at rivals this year and Ermotti working to regain his footing.

Profit before tax in wealth management missed analyst estimates as competition drove down revenues from loans to wealthy clients, even as the bank added new money in most regions. Net interest income, which tracks the money made from loans and deposits, declined by $75 million compared with a year earlier, in a trend flagged last week by U.S. rivals.

Mixed Fortunes

Ermotti joined Wall Street peers warning that income from lending will come under more pressure after a sudden reversal in expectations for interest rates globally. Earlier this year, he surprised investors by describing conditions in the first quarter as some of the worst in recent years.

Net interest income “will come under pressure, not only because rates had a complete u-turn in respect of expectations,” Ermotti said in the interview. In addition to the impact on U.S. bonds, “we also had headwinds from the euro and the Swiss franc rates. At the end of the day, if you sum it up, this is a huge change.”

The bank earlier this announced some $300 million in additional cost cuts, to be achieved by slowing hiring and the pace of investments, in response to deteriorating markets. On Tuesday, Ermotti signaled that the bank may struggle to reach its 15% adjusted return on tangible equity goal.

“Finishing the first half of the year very close to 15% makes me comfortable that we can get to a level in line with last year’s performance, which was around 13%,” he said in the interview. “So I do think that we will see.”

Other key results from UBS’s second quarter:

• Net income of $1.4b versus estimates of $957m
• Global wealth management posts about $2b of outflows
• Wealth management assets at $2.49 trillion
• CET1 ratio of 13.3%

To contact the reporter on this story: Patrick Winters in Zurich at pwinters3@bloomberg.net

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

©2019 Bloomberg L.P.