UBS Misses Key Targets in Challenge to Iqbal Khan Overhaul

(Bloomberg) --

UBS Group AG missed key targets for 2019 as investors pulled money late in the year, underscoring the challenge for new wealth management co-head Iqbal Khan as he seeks to turn around its most important business.

The Swiss bank failed to meet several metrics set during a revamp of its goals just over a year ago, highlighting mounting headwinds for European lenders while U.S. rivals post record profits. The downgrades were across the board -- on profit, cost efficiency and dividend growth -- while the private bank unexpectedly saw $4.7 billion of outflows last quarter.

UBS shares declined as much as 5.9% in early Zurich trading, the most since May, and were 5% lower as of 9:07 a.m. local time.

The downgrades mark a reversal for Chief Executive Officer Sergio Ermotti after he rejigged goals in Oct. 2018 under pressure from investors. To help restore the bank’s edge and strengthen the bench of potential CEO successors, Ermotti in in October brought in Khan from Credit Suisse. The new executive is cutting jobs, speeding up decision making and giving more autonomy to the regions in an effort to revive the wealth business.

Here are the key numbers and new targets from UBS’s results:

• Wealth management outflows of $4.7 billion driven by Americas
• Return on CET1 capital of 12.4% in 2019 below 15% target.
• Now targeting CET1 capital metric at 12%-15% to 2020-2022
• Adjusted cost-to-income ratio of 78.9% missed target of 77%
• Now targeting cost-to-income metric at 75%-78%
• 1 cent a share dividend rise going forward; had sought mid-to-high single digit percent
• $722 million net income beats company compiled estimate of $682 million

UBS isn’t alone in dialing back its ambitions in an era of negative rates, investor caution and escalating trade tensions. Credit Suisse toned down its target in December, while Deutsche Bank AG last month warned that its mid-term profitability goal now appears to be “more ambitious,” and it will rely more on volatile investment banking to reach its revenue target. Italy’s UniCredit SpA is cutting 8,000 jobs as part of its new multi-year plan to boost returns in the face of limited growth prospects.

Deutsche Bank Cuts Investment Bank Bonuses About 30% in Overhaul

The lower targets -- and outflows -- overshadowed a strong finish to the year in which the bank posted better than expected net income and investment banking results while boosting its core financial strength. UBS also gave a moderately positive outlook for the first quarter, saying client activity is picking up and the favorable credit environment and partial resolution of trade disputes should help mitigate slowing global economic growth.

“Higher invested assets and seasonality bode well to 2020’s start, but a miss on wealth flows is a concern,” Alison Williams, an analyst with Bloomberg Intelligence, wrote in a note.

The fourth quarter marks the first for Khan at UBS since his acrimonious departure from Credit Suisse in the summer, followed by a spying scandal in which he was followed through the streets of Zurich by an espionage agency hired by his former employer. After being given 60-days by Ermotti to come up with a plan for the wealth management business with co-head Tom Naratil, he’s relying on many of the levers of his success at Credit Suisse: more power to the regions, boosting lending to rich clients and moving customers who don’t need complex services to cheaper models.

Thiam Stumbles After Restructuring, Credit Suisse Cuts Goals

As part of his overhaul, Khan is also dismantling the ultra-high net worth business as well as a miniature investment bank within the wealth unit that was seen as a drag on loan approvals and a source of costs. He also split up the business serving Europe, the Middle East and Africa and is cutting 500 jobs. Among his first challenges -- with Naratil -- will be to stem the unexpected outflows at the business which, in part, may have caused the bank to abandon a goal of net net money growth of 2%-4% per year.

“We have been working hard to reposition the business and execute on the strategy,” Ermotti said in a Bloomberg Television interview. “We don’t need shake ups, we just need to go into execution.”

UBS Wealth Bankers Get Dose of Credit Suisse Tonic in Khan Plan

While UBS’s job losses are smaller than at many competitors -- Deutsche Bank is culling 18,000 positions -- it’s the first time in years that UBS’s private bankers have felt the heat. For a decade, they’d driven growth as Ermotti pivoted UBS away from investment banking and toward the business of managing money for the rich. The strategy worked well after the financial crisis, when ultra-low interest rates fueled a wave of wealth creation around the world.

Here are some other highlights of the results:

• Pre-tax profit at the wealth management business also beat expectations
• Will return incremental capital through share repurchases
• To complete 2 billion franc buyback program in summer
• Targeting 10-15% profit before tax growth in global wealth management
• Bank says it now manages $3.6 trillion of assets

For now, Khan’s arrival has taken pressure off the CEO to come up with a bigger strategic overhaul. A year ago, Ermotti was under pressure after Chairman Axel Weber blindsided the executive with the comment that the bank was in the early stages of succession planning.

To contact the reporters on this story: Marion Halftermeyer in Zurich at mhalftermeye@bloomberg.net;Patrick Winters in Zurich at pwinters3@bloomberg.net

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

©2020 Bloomberg L.P.