Rich Clients Add $22 Billion to UBS This Year

(Bloomberg) --

Rich Asians came to the rescue of UBS Group AG in the first quarter after Chief Executive Officer Sergio Ermotti’s dire outlook on market conditions sent investors into shock and investment banking revenue plummeted.

Wealthy clients in the Asia Pacific region accounted for almost three-quarters of the $22.3 billion of net new money that the Swiss bank attracted in the first three months of the year, marking a rebound after outflows in the fourth quarter. Fresh inflows and better than expected profit were the bright spots in a quarter that saw a slump at the investment bank and weakness at UBS’s asset management unit.

Ermotti said the market environment had improved since March, when he described the first quarter as one of the worst in recent history, forcing the bank to cut an additional $300 million in costs. The CEO has been hit by a slew of bad news as of late, ranging from investor discontent with his strategy to the departure of his former investment bank head to a $5 billion penalty in a French tax case. That’s left the stock trailing the rebound in the shares of its main rivals this year.

“We had a very strong finish for the quarter, which is coming a little bit into April as well,” Ermotti said in an interview. “In the second half of March market conditions and most importantly investor sentiment changed for the good.”

Investment banking revenues in the quarter declined 27 percent from a year ago while global wealth management was down about 9 percent, roughly in line with the guidance given by Ermotti. The bank said cost cuts announced in March should pay off in the second half and it was on track to meet a goal of returning as much as $1 billion through buybacks this year. That came after speculation it may be forced to curtail the program because of a huge fine in France related to allegations that it helped clients evade taxes.

UBS’s first quarter highlights
  • 1Q net income $1.14 billion, down 27 percent; estimate $860.2 million (Bloomberg data)
  • 1Q pretax profit $1.55 billion, down 26 percent
  • 1Q operating income $7.22 billion, down 12 percent

UBS rose 1.4 percent at 9:03 a.m. in Zurich trading. The stock has risen 11 percent this year, trailing the 24 percent advance of Credit Suisse Group AG.

UBS slashed thousands of investment banking jobs over the past decade in a pivot toward private banking that has become a blueprint for rivals including Credit Suisse. While that shift has reduced earnings volatility, it’s left the bank open to revenue dips after market corrections or when clients stay on the sidelines.

Ermotti’s comments come after Credit Suisse on Wednesday said its “cautiously optimistic” as client confidence returns and positive momentum in March continues into April. CEO Tidjane Thiam, whose bank remains more dependent on trading, suggested the bank benefited from selling investment banking products to wealthy clients in the first quarter, helping it beat Wall Street peers in trading during the quarter.

At UBS, which pioneered that cross-selling model in Switzerland, equities revenue was down 22 percent, driven by derivatives and lower revenue from business with hedge funds. The business of advising clients on deals and issuance of stocks and bonds slumped by 48 percent.

The comparison with last year’s first quarter was particularly challenging because the bank benefited from a boom in trading at that time. UBS also depends more on equities than its smaller Zurich rival, a business that fared worse in the first quarter than fixed income trading.

The asset management unit -- the business of selling funds to less affluent investors -- has struggled to gain scale for years, and UBS is now evaluating options including a partial sale or merger of the operations, people with knowledge of the matter have said. The Swiss bank has considered seeking to acquire Deutsche Bank AG’s asset manager DWS Group, potentially to combine it with its own business and spin off the two as a separate entity, the people said, asking not to be identified because the matter is private.

Weakness in asset management continued, with clients adding just 0.1 billion francs in net new money during the first quarter. Excluding money market flows, the number came in negative.

“Our asset management business has gone through a lot of restructuring and is well positioned for the future,” Ermotti said in the interview. “It’s not surprising that in the asset management industry you are hearing rumors about different players, but we are not commenting on specific M&A situations.”

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