UBS's Ermotti Seeks to Quell Investor Concern With Target Revamp

(Bloomberg) -- UBS Group AG Chief Executive Officer Sergio Ermotti took a bolder set of financial targets back to investors, pledging to drive wealth management profit higher and cut costs as he seeks to revive the shares.

The tweaked targets as part of the bank’s investor day included profit growth in private banking, a commitment to cut about 800 million francs ($800 million) of costs and further boost capital. The bank kept a January goal of attracting net new money and said it’s ahead on its share buyback plans. It also said it may take longer than expected to meet some of its goals.

Ermotti is under pressure to show investors how the bank can reap greater profits from a merger of its two wealth management businesses and revive a lackluster share price. As competitors close in, some investors have approached the bank to ask about performance, people with knowledge of the matter have said. A 2-billion-franc ($2 billion) share buyback plan earlier this year was questioned by investors who said the bank had room to do more.

‘Broadly Consistent’

“Previous guidance was for up to 2 billion francs which we still believe could be increased over time,” Citigroup analysts led by Andrew Coombs wrote in a note to investors, saying the bank could return double that figure to 2020. “UBS’s financial targets are broadly consistent with existing consensus.”

Chief Financial Officer Kirt Gardner said at the investor day in London that the bank would update investors on its buyback and dividend plans at the time of its fourth-quarter results.

If the new targets didn’t mean much of a change for some, third quarter results -- also released on Thursday -- may have buoyed investor optimism about the bank’s prospects: Net income for the period beat the highest estimate, with pre-tax profit also ahead of expectations. The bank is also shifting to reporting in U.S. dollars as of this quarter.

UBS’s Third Quarter Highlights
  • Net income of 1.25 billion francs vs 962.3 million franc estimate
  • Pre-tax profit 1.67 billion francs vs 1.3 billion-franc company compiled est.
  • Investment bank pre-tax profit 472 million francs.

Changed Targets

UBS's Ermotti Seeks to Quell Investor Concern With Target Revamp

The bank had already modified targets in January, underwhelming analysts and investors who had argued that they were too conservative and the bank should do more to improve returns and bring down costs. On Thursday the lender said it has already exceeded its buyback target for the year, acquiring 650 million francs of stock. It expects to boost its dividend by a mid-to-high single-digit percent per year.

“I’d say the good third-quarter results saved the day," said Martin Moeller, a fund manager at private bank UBP. He holds UBS shares.

While UBS shares have declined about 23 percent this year, that’s still better than rivals Credit Suisse Group AG which has lost about 27 percent and Julius Baer Group Ltd.’s 26 percent drop. UBS shares rose 1.9 percent in Zurich to 13.50 francs.

While seeking to convince investors about the potential of the wealth management business, Ermotti is contending with the sudden departure of investment banking head and top dealmaker Andrea Orcel, who is leaving the lender to become chief executive officer of Banco Santander SA. The investment bank had outperformed other units in recent quarters, with the bank saying strategy is set to remain unchanged under newly minted co-heads Piero Novelli and Rob Karofsky.

Here are some of the other highlights of the investor day:
  • Net new money growth of 2-4 percent per year in wealth management
  • At least 3 percent growth in net new money by 2021
  • Adjusted cost to income ratio of about 72 percent by 2021 versus an earlier target of 75 percent. Figure is set to be about 77 percent in 2019
  • Reduce corporate center costs by 800 million francs over the next three years
  • Expects to grow revenues at least as fast as GDP growth
  • Bought back 650 million francs of shares in 2018 versus 550 million francs target

The appointment of Martin Blessing and Tom Naratil as co-Presidents of the combined Global Wealth Management business puts two potential successors to Ermotti at the top of the bank’s most important unit, responsible for the bulk of pre-tax profit.

Ermotti and Chief Financial Officer Kirt Gardner faced a grilling from analysts about why the new targets in January -- from group profitability to net new money -- weren’t more aggressive. Ermotti defended the goals as ambitious, “realistic" and achievable considering the lack of clarity from a macroeconomic and geopolitical standpoint.

©2018 Bloomberg L.P.