UBS Profit Outstrips Expectations as CEO Warns on Looming Risks

(Bloomberg) — UBS Group AG posted results that beat expectations across the board, as risks from regulation to market gyrations appear on the horizon. 

Listen to the Here’s Why podcast on Apple, Spotify or anywhere you listen.

Shares in the Zurich-based bank briefly rose to the highest since May 2008 before erasing gains. Net income came in at $1.4 billion, almost double analyst estimates, aided by trading and progress on controlling costs. The lender has now delivered three profitable quarters after sustaining losses linked to the acquisition last year.

Yet the bank warned that geopolitical events, the US election and declining global interest rates would make the final quarter of the year hard to predict. The macroeconomic outlook for the rest of the world also “remains clouded,” it said. 

“Right now the markets are pricing rather a Trump victory,” Chief Executive Officer Sergio Ermotti said in an interview with Bloomberg Television’s Francine Lacqua. “If Kamala Harris wins, some of the trades that are ongoing for Trump will probably have to be reconsidered and therefore they are going to create rotations in the market.”

Clients shifting portfolios may benefit the Swiss lender in any case, as volatility in the third quarter helped equities traders post surging revenue. Switzerland’s largest bank is currently working through complex parts of the integration of Credit Suisse, including the migration of more than a hundred petabytes in client data. 

UBS shares traded down 2.6% at 12:52 p.m. in Zurich. The lender is facing high uncertainty over its future capital levels due to a Swiss political review of the crisis, and could end up seeing its requirement rise by as much as $25 billion. 

A lack of any further guidance from Ermotti on an analyst call on that front is one reason investors became more cautious on the stock, according to Andreas Venditti, an analyst at Vontobel in Zurich. 

The bank said it chose to phase out a regulatory benefit relating to the takeover of Credit Suisse, leading to a 60-basis-point decline in its main capital ratio, CET1, to 14.3%. The step didn’t affect plans to complete around $1 billion of share buybacks by the end of the year, though capital return plans after 2025 are subject to the Swiss regulatory overhaul, it said.

The Swiss parliament is set to release its investigation into the Credit Suisse crisis before the end of the year, which will feed into the design of new ordinances and legislation governing capital. In addition to higher capital requirements, UBS must also now rework its emergency and resolution plans as a result of its bigger size and complexity, the regulator Finma said earlier this month. 

“Uncertainty on the implications of the Too-Big-To-Fail report remain but good earnings momentum and execution of the merger synergies provide support,” analysts at RBC Capital Markets including Anke Reingen wrote in a note. 

UBS said it made further progress in moving former Credit Suisse clients on to their own systems in October, helping to cut costs. 

The lender is now more than half-way to its overall cost-saving goal of about $13 billion by 2026, Chief Financial Officer Todd Tuckner said on a call with analysts. 

As central banks around the world cut rates, UBS warned that interest income is set to drop in the fourth quarter, while costs would see a “seasonal up-tick,” it said. Lower interest rates would also spur client demand for portfolio changes and alternative investments, Tuckner said. 

What Bloomberg Intelligence Says

UBS’ acquisition execution is on track, with 52% of targeted gross-cost savings delivered, a less-than-expected non-core loss in 3Q and asset cuts ahead of the year-end target. Revenue shows the effect from robust equities, with 27% year-over-year adjusted trading gains outperforming most peers in equities and leading in its smaller FICC unit. Wealth flows of $24.7 billion are in line, with broad regional inflows and $7.3 billion in Asia showing solid momentum, supporting the core franchise.

— Alison Williams, BI Senior Industry Analyst, Ravi Chelluri, BI Senior Associate Analyst

 

–With assistance from Macarena Muñoz.

(Updates with markets in sixth paragraph)

©2024 Bloomberg L.P.