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UBS Is Beating American Lenders on Their Own Turf

UBS Is Beating American Lenders on Their Own Turf

Swiss interest rates have been deeply negative for more than six years, and banks everywhere are struggling to get customers to borrow. But UBS Group has an answer.

While the bank’s third-quarter profit beat forecasts on Tuesday, helped by the same wave of dealmaking and trading that has boosted investment banks everywhere, it’s the wealth-management results that really stand out. The unusual story there is lending. At UBS, net interest income provided a good chunk of revenue growth in both the third quarter and over the first nine months of 2021.

In contrast, JPMorgan Chase saw flat net interest income in the third quarter, while Bank of America reported growth of about 11%, mainly from putting more spare cash into Treasuries and other bonds. Neither saw loans grow much.

The trick at UBS was a big push to get more of its rich U.S. clients to borrow against their homes or financial assets. Lending balances in its U.S. wealth-management business grew 27% to $87.5 billion in the third quarter from the same period last year. That far outpaced other regions and helped to drive a 12% rise in third-quarter net interest income. For the first nine months, UBS’s interest revenue was up more than 16%.

UBS Is Beating American Lenders on Their Own Turf

The people it is lending to typically already have assets with the U.S. wealth business, but they have borrowed from elsewhere. Chief Executive Officer Ralph Hamers said the bank wasn’t getting clients to borrow more, but convincing them to refinance their debt with UBS.

The bank could do more of it, too. Its U.S. clients collectively have loans with UBS equivalent to about 5% of their investments with the bank. That’s lower than in UBS’s other markets, like Switzerland where the ratio is 15%, or Asia where it’s about 9%.

The debt is mostly residential mortgages and loans against shareholdings or other investments. These latter loans can go wrong, especially if markets tank, but they’re an efficient use of capital: UBS’s risk-weighted assets, a measure of the balance sheet used to set capital requirements, have grown at a slower pace in its wealth business than its loans and the plain measure of its assets.

The bank has spent a few years trying to improve the growth and profitability of its U.S. wealth arm. This is one sign those efforts are paying off. 

UBS also did well from the investment banking and trading boom that has been the dominant industry story line of the past 18 months. Its equities-trading business in particular did almost as well as its U.S. peers, where revenue growth of 25% to 50% over last year was the standard.

UBS beat Barclays with equities-trading revenue that was up 24% year-on-year, excluding last year’s gain from a sale of an index business. Like its rivals, UBS also pointed to growth in its hedge-fund servicing business as part of its equities success.

The one big question remains a still-unresolved French tax case, where a court hit the bank with a 4.5 billion euro ($5.2 billlion) fine for helping clients avoid tax. A decision on UBS’s appeal is due in December. 

That sum almost exactly matches how much extra capital UBS now holds above its targeted capital ratio. If the judgment goes UBS’s way, investors will expect a big share buyback to follow.

Once that cloud has cleared, the bank’s shares should trade above book value once more, rather than at the discount of the past three years.

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

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.

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