Even Swiss Bankers Are in Bubble Territory

For the first time since the financial crisis, UBS Group AG beat all of its targets. Delivering its highest income in a decade — $6.6 billion — the world’s largest wealth manager finally proved it can expand while being as profitable as it has long promised investors.

But the asset bubble that’s made the rich even richer is an aberration that pulls in private bankers, too. As is true across asset classes, from Bitcoin to rock-bottom bond yields, this situation cannot be sustained in perpetuity. The new UBS chief executive officer, Ralph Hamers, must still wield the trimmers while the good times are here.

All told, there wasn’t much not to like in UBS’s 2020 results, Hamers’s first set of earnings as boss. Each quarter was consistently strong, income grew across businesses and — crucially — provisions for souring debt were miniscule compared with peers, thanks to UBS’s smaller and more conservative loan book. That will let UBS bolster its share buybacks to $4.5 billion over three years. Pretax profit in Asia, a region UBS is betting on for future growth, more than doubled to $2.2 billion. Asia is now not far behind UBS’s home market of Switzerland and the Americas as a profit center.

Along with other managers of wealth assets, UBS has benefited from the trillions of dollars that governments and central banks have pumped into economies ravaged by the pandemic. The Swiss bank’s customers have been buying and selling securities at an unprecedented pace, with transaction income up 17%. A surge in trading activity also bolstered the UBS investment bank, whose income rose 30% in 2020. Perhaps the clearest sign of UBS’s success during the Covid-19 outbreak are the funds it attracted: Net new money in the wealth unit jumped to $46.6 billion last year, a 37% increase on 2019.

Still, Hamers won’t have the luxury of sitting back. His bank may get slapped with a record fine in France later this year for tax evasion by its clients, which could cost billions. A greater challenge is that UBS, more than its European peers, is a leveraged play on equities. Warnings of bubbles sweeping through markets are a reminder of how fickle the bank’s run may be.

Take the turbocharged growth in loans to wealthy customers, up 19% last year. While UBS will hope to take market share from its rivals, client appetite in this business in part reflects the animal spirits let loose by market mania. In the investment bank, too, the Swiss bank’s income from derivatives and structured products — a lumpy and at times risky business — jumped more than 50% to $3.6 billion last year. These are clear signs of how UBS has relied on investors’ “risk-on” appetite.

What’s more, underlying pressures on the business have intensified. While charging for deposits is helping somewhat, profit margins have become thinner as interest rates have declined, eating into lending income, and new client mandates are securing lower fees. UBS saw its gross margin on invested assets drop another basis point last year to 0.65%.

In the meantime, operating expenses — a perennial drag on UBS’s returns — rose again last year. Though part of the increase was caused by currency swings and staff bonuses, the degree to which the bank can cut costs is limited. If UBS wants to keep making big investments in technology, which accounted for 11% of revenue in 2020, job cuts paused because of the pandemic may well return.

After all, Hamers was brought in partly to make UBS leaner and fitter. On Tuesday, in his first remarks about the bank’s strategy, the Dutchman didn’t give much away. He sees more room for joint ventures in countries with larger local banks, such as Brazil. But he also spoke of the bank becoming more efficient, including in investment banking, and far better at allocating investment spending.

Hamers has a vision for artificial intelligence helping UBS’s wealth advisers win more business. It’s unlikely robots could replace the beneficial effects of market exuberance on UBS’s returns any time soon.

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.

©2021 Bloomberg L.P.

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