UBS Profit Beats Estimates in Boost to Ermotti’s Buyback Plans

This content was published on August 14, 2024 - 09:58

5 minutes

(Bloomberg) — UBS Group AG posted higher than expected profit in the second quarter, as investment banking revenue and progress in integrating Credit Suisse helped bolster Chief Executive Officer Sergio Ermotti’s efforts to return capital to shareholders.

The Zurich-based bank said net income was $1.1 billion, about double analyst estimates. Growth in deal-making revenue at the investment bank beat many Wall Street peers, while a lower than expected loss at the unit dedicated to winding down Credit Suisse legacy assets helped offset a miss in the wealth management division.

A year after completing the takeover of Credit Suisse, UBS is on track for pre-merger levels of profitability, and plans to repurchase some $1 billion in shares this year. Yet tougher Swiss regulation being designed over the next couple of years could mean sharply higher capital demands, prompting analysts to question whether the bank will have to reduce its payouts.

“I don’t think this will happen,” Ermotti said in an interview with Bloomberg Television’s Francine Lacqua. “We will find out probably later this year, early 2025 the direction of travel. Then we can make an assessment.”

UBS shares were up 2% at 9:42 a.m. in Zurich.

Ermotti said the bank has entered technical discussions with the government and regulators over plans to overhaul Switzerland’s rules around bank capital and liquidity. The revamp is one of the political consequences of the Credit Suisse collapse last year. Despite being called on to rescue its former rival, the bank is now in the cross-hairs due to its increased size and systemic relevance.

The Swiss parliament is set to release its investigation into the Credit Suisse crisis toward the end of the year, which will feed into the design of new ordinances and legislation governing capital. In particular, UBS faces much higher requirements to back its foreign subsidiaries with capital, with some estimates seeing the increase as much as $25 billion.

Analysts broadly saw the results as solid, though Deutsche Bank AG noted that uncertainty around the capital return plans remains high.

In its outlook, UBS said it sees “positive investor sentiment” into the third quarter, and continued momentum in client transactions. Elections in the US and geopolitical tensions are expected to lead to higher market volatility in the second half of the year, the bank said. Lower interest rates and client portfolio shifts could dampen interest income, it said.

Ermotti said that the sell-off in global markets last week was a sign of continued fragility, and investors should pay attention to diversification.

In the integration, UBS said it had achieved a reduction of 42% in the Credit Suisse assets marked for wind-down since the second quarter of last year, and $8 billion in the last quarter alone.

The wealth management unit saw client inflows of $27 billion, maintaining the pace of the first quarter, though higher compensation costs for advisers brought the pre-tax profit lower than expectations, at $871 million. The division accounts for about half of UBS’s revenue.

UBS recently reorganized its wealth management arm into a new unit that brings its range wealth offerings under one roof. The bank also reshuffled its leadership structure, appointing investment bank head Robert Karofsky to run its US business and jointly oversee wealth with Iqbal Khan. Khan was also made president of the Asia-Pacific region.

The investment bank outperformed expectations, posting $477 million profit before tax in the quarter, driven by higher revenues in global markets and global banking businesses. Revenue from advisory was 23% higher year on year, and the underlying result for capital markets was up 82%, not including an adjustment related to the merger. The bank’s traders are likely to continue to profit from clients shifting their portfolios amid ongoing market volatility.

Into the third quarter, the bank said it expected to book about $1.1 billion in integration-related expenses, while the pace of cost-savings will decline modestly, it said.

In June, the bank offered investors in Credit Suisse funds linked to the collapse of Greensill Capital a deal whereby they would receive 90% of the fund’s value before they were shuttered. The bank said Wednesday that 92% of investors took advantage of the offer, helping to close another legacy issue from the takeover.

UBS continues to reduce the number of employees as it fuses the two global banks. Total headcount fell by more than 3,500 in the quarter, bringing the workforce to about 133,000. The bank’s CET1 ratio, a key measure of capital strength, stood at 14.9% at the end of the quarter.

What Bloomberg Intelligence Says:

UBS’ EPS estimates may rise following results that included $27 billion of wealth inflows, with positive sentiment and momentum in client activity entering 3Q. Equities trading and banking fees beat estimates and deal execution shows progress toward profitability with non-core assets potentially 15% lower at year-end than anticipated at 1Q.

Alison Williams, BI senior analyst

–With assistance from Levin Stamm and Leonard Kehnscherper.

(Updates with UBS shares)