Swiss Bankers Prove Their Mettle in a Crisis

As Sergio Ermotti prepares to stand down from the top job at UBS Group AG, he’s providing valedictory proof of the company’s wisdom in retreating from risky trading and lending businesses.

The Swiss banking giant isn’t problem free. Pressure on its profit margins is persisting and an attempt to seek growth in Asia amid heightened geopolitical tension will keep his successor busy.

Nonetheless, UBS on Tuesday reported second-quarter net income of $1.2 billion, well ahead of analyst estimates, bolstered by higher income from its investment banking and wealth businesses. In a quarter scarred by the Covid-19 pandemic, this is impressive. Even a decline in equity trading revenue — after derivatives wagers backfired — couldn’t sour the performance.

Other banks may be fretting about bad loans, but not this one. Loan-loss provisions of $272 million in the three months through June were minuscule compared to its peers and they should decline in the second half of 2020. Ermotti sees no reason to review the bank’s financial targets, welcome news in the midst of the biggest recession in living memory.

Crucially, the bank’s ability to bolster its financial strength through the crisis is putting UBS in a category of one in Europe. Its common equity Tier-1 ratio jumped to 13.3%, up from 12.8% at the end of March. While cautioning that “a few months are like an eternity” during the pandemic, Ermotti said the lender plans to pay the second tranche of its 2019 dividend and may return to buying back shares in the fourth quarter.

Regulators in Europe and the U.S. have guided against shareholder payouts, but Switzerland has no such qualms. The country’s prudency in the aftermath of the financial crisis has become an advantage.

UBS also plans to review its mix of dividends and share buybacks to favor purchasing stock, a move that would bring it closer in line with Wall Street peers. While it’s possible that Ermotti’s successor as chief executive officer, Ralph Hamers — who joins in September— may revisit the pledge, investors liked what they heard. UBS shares rose on Tuesday to their highest point since February.

It helps too that the wealth management business is raking in funds, with net new money increasing $9 billion in the quarter. Still, this came predominantly from clients in Europe, the Middle East and Africa. There was a a large client withdrawal in Asia, the region that UBS is betting on for growth.

While political tensions between the West and China haven’t had a major impact on UBS’s client activity in the region, and the bank had an exceptional quarter of profit in Asia generally, it is monitoring the situation. 

As rich clients shifted more of their money into passive investments, the profit margin in the wealth-management business also fell again. The good news for Hamers is that the bank made progress in cutting costs in the unit. A once-in-a-lifetime shift toward working from home will also create opportunities to reduce expenses. Ermotti expects as much as a third of the bank’s staff to be working remotely after the pandemic.

But there’s little room for error. Hamers wants to shift to more automated banking, which will demand hefty investment and a degree of subtlety when dealing with wealthy customers who prize the personal touch. Push too fast on the digital accelerator and UBS risks leaving its prized rich clients behind.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2020 Bloomberg L.P.

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