UBS’s Ermotti Says No Choice in Spreading Negative Rate Pain

(Bloomberg) -- UBS Group AG Chief Executive Officer Sergio Ermotti warned more wealthy clients could be at risk of feeling the pain of negative interest rates, while keeping a protective hand over his smallest depositors.

As central banks in Europe push interest rates even further below zero, UBS may have “no choice” but to pass on more of the costs, Ermotti said in an interview from Beijing. He emphasized the bank “will not pass negative rates to smaller clients, the personal banking clients.”

“Right now, the threshold is very high still,” Ermotti said. “It’s difficult to make a prediction right now, but we are quite convinced it’s not going to go down to smaller investors.” The bank currently charges clients for deposits of more than 500,000 euros ($554,000) or 2 million Swiss francs ($2 million).

While central banks around the world are reducing interest rates in response to slowing economic growth, Europe is particularly hard hit. The region has experimented with negative rates for several years now. The ECB, the Danish, and Swiss central banks have all sought to stimulate growth by charging banks to deposit funds, rather than lending to consumers or businesses.

The policies have eroded margins on lending and forced more and more firms to pass on charges for excess cash. Credit Suisse Group AG has said that clients with deposits greater than 1 million euros or 2 million francs would incur a negative rate. Deutsche Bank plans to pass on negative rates to large corporate customers or wealthy clients, but will spare most retail clients.

Those headwinds have weighed on shares of European banks, with UBS falling about 13% in the past year. The firm also had to contend with increasing competition for wealthy clients, slowing economic growth, as well as a legal dispute in France.

Ermotti spoke at the New Economy Forum, an event organized by a division of Bloomberg LP, the parent company of Bloomberg News. The UBS CEO and executives from rivals such as Goldman Sachs Group Inc. are in Beijing this week as China prepares to start allowing full ownership of local firms by foreign companies next year, a key step in opening its $40 trillion financial markets.

Read more: China’s Banks Are Catching Up on Wealth

To tap fresh sources of growth, UBS has had a presence in China longer than most Wall Street firms, and it was the first foreign firms to win approval for a majority stake in a local securities venture as the country opened its financial sector. But the bank also faces stiff competition from local Chinese competitors, which are quickly adding assets under management.​

After getting all the necessary licenses, Ermotti, 59, said he was bullish on taking his business in China to the “next level of growth,” while cautioning that this will “take years.” The bank doesn’t necessarily need to own 100% of its venture in China because it has been working well with its partner there, Ermotti said.

“We are firmly of the opinion that the secular trend supporting China and particular also our business are very good,” Ermotti said. “We will continue to invest and grow.”

To contact Bloomberg News staff for this story: Marion Halftermeyer in Zurich at mhalftermeye@bloomberg.net;Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, ;Candice Zachariahs at czachariahs2@bloomberg.net, Christian Baumgaertel

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With assistance from Bloomberg