UBS UBSG.S doubled third quarter profit and set aside $2.5 billion to return to shareholders next year, a lucrative passing of the baton from CEO Sergio Ermotti to Ralph Hamers, as the Swiss bank reaped the benefits of helping the world’s ultra-rich navigate the COVID-19 crisis.
Net profit at the world’s largest wealth manager rose to nearly $2.1 billion, handily beating expectations, as clients scrambled to trade and seal deals amid a boom in markets.
While the trading rally has helped some major banks brace for an expected jump in virus-induced bad debts and compensate for the impact of record-low interest rates, Ermotti, who will hand over to former ING INGA.AS boss Hamers next month, warned lenders needed to keep cutting costs.
“The banking industry is changing rapidly and there is no room for complacency. We have to make further strides to become more efficient and effective,” he told analysts and journalists on earnings calls.
“My only advice (to Ralph) is to use the luxury of the fact that we are not under any need to take drastic and quick decisions.”
UBS said it has so far accrued $1 billion for a cash dividend to be paid out next year, and has also set aside $1.5 billion in capital reserves for potential share repurchases after regulators called on banks to conserve capital because of the coronavirus crisis.
UBS shares traded 4.3% higher shortly after noon, also bolstered by the 2021 buyback hopes.
Investment banking saw earnings more than triple during the quarter thanks to a spike in trading and equity capital markets, helping revenue in both its equities and foreign exchange, rates and credit units jump over 40%. Asset management saw profits grow six times from a year ago.
Wealth management, meanwhile, upended expectations with an 18% rise in pre-tax profit despite a client shift into lower-margin funds, as clients continued trading and as it wrote $10 billion in net new loans.
The unit’s managed assets rose to an all-time high of $2.754 trillion, despite a $4 billion withdrawal by a single client in the Europe, Middle East and Africa region.
The sharp profit rise for Europe’s first major lender to report third-quarter results follows a mixed performance for big U.S. banks that saw those focused on trading clocking big gains while retail banks took a hit from the pandemic.
NOT WITHOUT IRONY
The robust showing by UBS’ investment bank marks an ironic sendoff for Ermotti, who during his near-decade at the helm radically shrank the division and ramped up its focus on serving the world’s rich.
He also wound down most of UBS’ fixed income business, a source of volatile earnings and the biggest trading fraud in British history, to focus on wealth management in a strategy soon followed by cross-town rival Credit Suisse CSGN.S.
But wealth management is contending with fierce margin pressure as well as rising global competition from powerhouses including U.S. giant Morgan Stanley MS.N.
“A key challenge for the new CEO is to continue to show consistent growth in the global wealth management franchise and revenues,” said Maria Rivas, Senior Vice President, DBRS Morningstar.
“In particular we see (UBS’s) global wealth management business in the Americas as a challenge given the significant outflows of net new money.”
Morgan Stanley last week crushed Wall Street profit estimates, with wealth management revenues up 7%, while smaller Swiss wealth management rival Julius Baer BAER.S on Monday beat expectations on stronger client inflows.
So far this year, UBS’ shares have dropped around 8%, better than the near 25% fall experienced by rival Credit Suisse but underperforming Morgan Stanley stock which is flat.
Since Ermotti took the reins in September 2011, the bank’s stock has seen a total 10% price gain. But its value has halved from a peak above 22 francs per share in 2015 under the weight of negative Swiss interest rates and geopolitical pressures.
Over that same period, Credit Suisse shares have halved in value, while JPMorgan JPM.N and Morgan Stanley shares have each more than tripled, reflecting the stronger position of Wall Street lenders in the wake of the global financial crisis.