UBS cuts mid-term targets after 2019 profit drop

UBS Group cut profitability targets on Tuesday as Switzerland's largest bank grapples with ultra-low interest rates and increased competition for wealthy clients.

Chief executive Sergio Ermotti, who successfully pivoted UBS away from investment banking to wealth management nearly a decade ago, is under pressure to retain UBS' edge in the business of managing money for the rich.

The bank said it would now target a 12-15 per cent return on core capital (RoCET1) and a reported 75-78 per cent cost/income ratio through 2022 after missing both ambitions in 2019. Its RoCET1 last year was 12.4 per cent while its reported cost/income ratio was 80.5 per cent.

The bank reported a 129 per cent rise in net profit for the final quarter of 2019, but that performance benefited from a comparison with the final months of 2018 when a market rout hurt earnings. Profit for the full year fell 5 per cent.

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The bank announced an overhaul of its flagship wealth unit under new co-head Iqbal Khan earlier this month but the moves, which will see hundreds of jobs axed and revived efforts to increase lending, were too late to salvage Ermotti's return on equity and cost targets.

UBS’ rivals have followed its strategy of cutting trading risk in favour of wealth management and the battle for clients along with ultra-low interest rates and the threat from passive investing have made it harder to compete.

Credit Suisse Group, Switzerland's second-biggest bank and UBS' main rival, in December lowered its profitability targets after reaching a 7.8 per cent return on equity in the first nine months of 2019, as compared to UBS' 7.9 per cent for the full year.

On Tuesday, UBS reiterated growth ambitions for its wealth management even as it scrapped targets for other divisions, saying it now expected pre-tax profit growth of 10-15 per cent for 2020-2022 as compared to an adjusted 10-15 per cent previously targeted over the 2019-2021 cycle.

That contrasts with Morgan Stanley, which is seeing the fruits of a long-term push into wealth management. Last week the US bank raised the bar for profit from its wealth division over the next two years after reporting a return on tangible equity of nearly 13 per cent.

Mr Ermotti put UBS in what he described as “fuel saving” mode last year to reduce costs, including freezing hiring, slashing bonuses and delaying spending.

But it has been hit by sliding profit and sluggish activity among its wealthy clients and the rise of passive investing which undercuts the high-fee, private banking model.

Shares in UBS were largely flat last year compared to a gain of almost 30 per cent since the start of 2019 at Credit Suisse. They have risen around 4 per cent since the wealth unit reorganisation was announced in early January. – Reuters