UBS Dodges Specter of Defaults But Warns Earnings May Take Hit

(Bloomberg) -- UBS Group AG expressed confidence it can withstand a surge in bad loans while warning that the unprecedented outbreak will put pressure on key streams of income at its wealth management business.

The bank -- which posted a 40% jump in profit to $1.6 billion -- said falling asset prices will erode recurring fee income while low interest rates hit lending income. Despite an expected drop in client activity, UBS indicated the “high quality” of its credit portfolio may shield it from more widespread defaults.

“We can be relatively optimistic about the extent to which credit losses will impact our future,” Chief Executive Officer Sergio Ermotti said in an interview with Bloomberg TV. “Our business model sees a high degree of concentration in lending exposure in Switzerland and in general to asset-based lending, so where we have a high degree of underlying guarantees.”

UBS Dodges Specter of Defaults But Warns Earnings May Take Hit

The bank’s focus on managing assets for the wealthy has left it with limited risk from corporate and consumer defaults that now threaten European and U.S. peers, allowing it to put less aside for future losses and post one of its most profitable quarters in years. UBS provisioned just $268 million for bad loans during the quarter, a fraction of its competitors.

Santander, HSBC

Banco Santander SA said on Tuesday it’s setting aside 3.9 billion euros ($4.2 billion), and HSBC Holdings Plc will take its biggest charge for bad debt in almost nine years, reporting provisions of $3 billion in the first quarter.

UBS rose 3.6% at 9:14 a.m. in Zurich trading, leading European bank shares higher. HSBC fell while Santander was little changed.

“UBS results are strong,” analysts Kian Abouhossein and Amit Ranjan at JPMorgan Chase & Co. wrote in a note.

UBS earlier this month said it expected first-quarter profit to be around $1.5 billion, surprising analysts who had expected a lower figure. While the amount the bank is setting aside for bad loans is low compared with peers, it’s still the highest since the financial crisis.

Touting strength across its businesses, the bank is now contending with an economic contraction of as much as 15% in the euro region this year and uncertainty about the duration of the lockdown in key markets including the U.S.

A key measure of capital strength fell in the first quarter, the result of higher risks on the balance sheet.

Net new money at the wealth management business was $12 billion, or $28 billion before $16 billion of outflows related to its program to charge for deposits. Still, invested assets had declined 11% by the end of the quarter because of the global market selloff. Ermotti warned this could mean a contraction of $200 million to $250 million in net recurring fee income.

Lending Push

“On recurring fees, it depends very much on where asset levels will be, particularly equity markets,” Ermotti said. “The starting point” for the second quarter “is lower.”

UBS, which last year hired Iqbal Khan from Credit Suisse Group AG to boost its wealth business, managed to push ahead with a strategy to lend more to rich clients, netting $3.9 billion new loans in the quarter. But margins will be dented as lower interest rates, particularly in the U.S., start to have an impact.

While it scaled back securities trading since the financial crisis, UBS’s investment bank still benefited from volatility in the quarter that also lifted Wall Street firms. Equities trading at its global markets business rose 18% from a year earlier, and fixed income revenue almost doubled.

Elevator Deal

The investment bank took a $183 million writedown on its leveraged capital markets, corporate lending and real estate finance portfolios, though related hedges more than offset that. UBS is an underwriter on the buyout of Thyssenkrupp AG’s elevator division, the largest such deal in Europe in a decade. When the pandemic hit, banks that had promised to provide financing were left unable to sell the debt in the market.

Credit Suisse took $293 million in writedowns for such deals. Including other writedowns and provisions, UBS’s main competitor took a $1 billion hit from the virus in the quarter.

Other key highlights from UBS’s first-quarter results:

  • Global wealth management pretax profit $1.22 billion, up 41%
  • Investment bank pretax profit $708 million, up 242%
  • Personal & Corporate Banking pretax profit 322 million francs, down 16%
  • Asset management pretax profit $157 million, up 52%; inflows of $33 billion

©2020 Bloomberg L.P.

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