UBS CEO Hands Successor Hefty Profits — and a Challenge

After nine years leading the world’s biggest wealth manager, UBS Group AG chief executive Sergio Ermotti is preparing to hand over to Ralph Hamers — just as the firm has reported some of its strongest earnings in years and set aside a large pot of funds to return to shareholders. Despite the strong position he’ll be inheriting, Hamers should not count on much of a grace period.

The bank’s results have been impressive throughout the pandemic. That’s a reflection of UBS’s years-long retreat from lending and riskier trading and move toward managing money for the wealthy, an activity that usually requires less capital and carries fewer risks. Still, revenue growth at the $3.1 trillion manager had been languishing in previous years. When Hamers takes over next month, he’ll need to grapple with an uncertain outlook for client activity and sales growth.

In the third quarter, a surge in trading helped UBS post better-than-expected profit and set aside $2.5 billion to return to investors in dividends and buybacks once regulators allow it. A drop in loan-loss provisions from the amount set aside for the pandemic also bolstered income, which was the firm’s highest in a decade before tax. Ermotti said the bank should not expect “any meaningful increase” of these provisions, “unless there is a huge, dramatic downturn in economies.” 

In the securities unit, revenue from credit, foreign exchange and rates rose 41%, better than most Wall Street rivals, while sales from trading equities increased 19% after adjusting for gains related to a sale. In wealth management, UBS’s biggest profit generator, the firm posted a surprise increase in net new money, and transaction-based income rose 16%. UBS continued to lend more to its wealthy clients, who borrowed an additional $10.5 billion just in the third quarter, helping the loan book grow by 10% this year. 

Higher revenue helped bring the bank’s cost-income ratio — a measure of efficiency — to its lowest point since 2006.

But there are reasons for caution. Market volatility, which fueled the bump in trading, could lead to less client activity in the future, the bank said. Although unprecedented spending from central banks and governments bolstered asset prices and market activity this year, both could come under pressure as countries return to partial lockdowns. 

Meanwhile, costs remain sticky. Operating expenses rose 9% in the third quarter from a year earlier, in part because the bank added staff to meet growing regulatory requirements and bring more activities in-house. Low interest rates will also put pressure on profit margins.

UBS is relying on growing its loan book to offset that pressure. Structured lending, the type that requires more capital to be set aside, is one area the bank plans to expand. But this will carry longer-term risks if borrowers can’t make good on their loans. 

Ermotti helped rescue UBS from the global financial crisis after losses forced the bank to turn to taxpayers. It’ll be up to Hamers to ease the pressures that continue to hold back its stock price. 

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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