(Bloomberg) -- UBS became a favorite with investors and the envy of European rivals after CEO Sergio Ermotti scaled back its trading unit to focus on managing the more than $2 trillion that wealthy customers have at the bank.

Three years on, as Credit Suisse Group and Deutsche Bank struggle to catch up -- ordering management shakeups and sweeping job cuts designed to shrink their securities businesses -- UBS is facing fresh hurdles of its own.

“While client activity has recovered somewhat from the lows we saw in the fourth quarter, transaction-based revenues have not rebounded to levels typically seen in previous first quarters,” Andreas Venditti, a Zurich-based analyst at Vontobel says.

UBS clients in regions including Brazil, Russia, the Middle East and Asia, reacting to losses in stock markets or businesses exposed to energy prices, sat out the turbulent second half of 2015 and yanked a net 3.2 billion Swiss francs ($3.3 billion) in assets. With markets still churning early this year, the Swiss bank may be headed for a third straight disappointing quarter in wealth management, its biggest division.


“With lower assets under management and lower margins, there is going to be a double whammy to revenues,” said Andreas Venditti, a Zurich-based analyst at Vontobel with a buy rating on the stock. “People might underestimate that wealth management is a cyclical business,” like investment banking.

The bank is still doing better than peers. UBS is trading at 125% of tangible book value, a measure of what the company would theoretically be worth if liquidated. That’s second only to J.P. Morgan among 10 global investment banks tracked by Bloomberg. Shares have outperformed its main European rivals in the past two years.

Credit Suisse has warned it may not make a profit in the three months through March because of restructuring costs and writedowns on illiquid securities. Deutsche Bank has said it doesn’t expect the year to be profitable.

Analysts surveyed by UBS earlier this month are estimating a 63% drop in first-quarter net income, with pretax profit falling 34% at its wealth management unit. That division, which doesn’t include the brokerage-based wealth management business in the U.S. and Canada, saw earnings decline 9.6% and 47% respectively in the third and fourth quarters, missing estimates both times. The bank reports on May 3.

“While client activity has recovered somewhat from the lows we saw in the fourth quarter, transaction-based revenues have not rebounded to levels typically seen in previous first quarters,” Ermotti said at a conference in London on March 16. “Our invested asset base will also be affected by declines in global markets, most notably equity markets, as well as changes in currency.”


Many entrepreneurs in emerging markets pulled funds to support businesses exposed to energy prices and other assets hit by the selloff, Chief Financial Officer Kirt Gardner has told investors. UBS declined to comment ahead of results, said Tim Cobb, a spokesman for Switzerland’s biggest bank.

As the first quarter is historically the year’s strongest, lower profit may erode dividends. The analysts in the UBS survey see profit dropping at every unit, with only the investment bank showing a steeper decline than wealth management. UBS plans an ordinary payout of 60 centimes and a special dividend of 25 centimes for 2015, the latter reflecting a tax gain. Ermotti, 55, said he doesn’t anticipate an extra payout for 2016.

Investors have piled into UBS since its revamp, enticed by its policy of returning at least half its profit to shareholders. While Ermotti reaffirmed the practice and said UBS aims to increase its dividend, he noted that the bank is also building capital to comply with new Swiss rules and support growth.

“No bank is aggressively distributing capital at the moment,” said Joost de Graaf, who helps manage about 3 billion euros ($3.4 billion), including UBS shares, at Kempen Capital Management in Amsterdam. “Eighteen months or a year ago, everybody was much more optimistic.”

When Ermotti took over in late 2011, UBS was reeling from $2.3 billion in losses by rogue trader Kweku Adoboli - this after a 2008 bailout during the subprime mortgage meltdown. In late 2012, the CEO announced an overhaul that culminated in a decision to eliminate 10,000 jobs and dismantle parts of the investment bank that the Swiss lender had spent more than a decade building.

“No profit is worth more than the bank’s reputation,” he said at the time. Since then, assets under management worldwide have swelled to 2.2 trillion francs from 1.76 trillion francs at the end of the 2012, making UBS the world’s largest wealth manager.


As investors applauded, other banks took note. Credit Suisse and Deutsche Bank last year stepped up efforts to pare back their investment banking arms. Besides stable earnings, they are seeking relief from post-crisis regulations requiring more capital to backstop debt-trading and other riskier activities.

Even after markets settle down, record-low interest rates will continue to squeeze profit. UBS forfeited about 10 billion Swiss francs in client assets last year in a year-old drive to discourage cash deposits.

A crackdown on tax evasion has also prompted outflows as customers in countries including France and Italy come clean on undeclared Swiss funds. The analysts surveyed by UBS estimated its wealth management division will take in a net 3.8 billion Swiss francs in the first quarter, a third of inflows a year ago.

“Net new money has also been under pressure from tax regularization and margins from low interest rates,” said Jon Peace, a London-based analyst at Nomura who has a neutral rating on UBS. “Focus on costs is important in this environment especially given a strong Swiss franc.”

The bank delayed its goal of returning 15% on tangible equity in November after Switzerland announced some of the world’s strictest capital requirements and trading for wealthy clients dropped to the lowest level in four years amid swings in emerging markets and China.

While wealth management tends to be less risky and volatile than investment banking, it isn’t immune to the market environment, said Martin Moeller, head of equity portfolio management at Swiss bank Union Bancaire Privee.

“If client activity is not there, you have a lack of revenue,” he said. “The difference from investment banking is that you don’t make a billion loss on that.”

Register or login for access to this item and much more

All Bank Investment Consultant content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access