UBS cast a shadow across Europe’s banking sector as Switzerland’s biggest lender blamed an economic slowdown and geopolitical tensions for missing analysts’ profit forecasts and for causing almost $13bn of client outflows.
The disappointing outcome of the first European bank to announce annual results followed a patchy performance from the biggest Wall Street banks last week and triggered a sell-off in shares of UBS and several of its rivals in Europe.
UBS’s market-leading wealth management unit was hit by a $7.9bn reduction in assets in the period as ultra-wealthy clients pulled money from plunging stock markets.
Combined with $4.9bn of investor withdrawals at its asset management business, that reduced the amount of net new money it collected last year to $24.7bn — less than half of the amount it collected the previous year.
UBS’s pre-tax profit rose just 2 per cent to $862m in the quarter, failing to meet the average analyst estimate of $985m, and its shares dropped more than 4 per cent.
Executives warned the negative environment had spilled over into the first few weeks of this year, but said they had seen some “normalisation” in markets more recently.
“These are very poor results, and come as somewhat of a negative surprise so soon after the upbeat investor day” in October, said Citigroup analyst Andrew Coombs. “The investment bank was a sizeable miss” on estimates and “wealth management was hit by large outflows”, he said, adding that “the bank’s targets for 2019 look increasingly difficult to achieve”.
The news added to bearish sentiment about Europe’s already downtrodden banking sector. Shares in Deutsche Bank fell 3.4 per cent, while Switzerland’s Julius Baer dropped 3 per cent and France’s BNP Paribas lost 2 per cent.
“Look, it is a very difficult fourth quarter,” Tidjane Thiam, chief executive of rival Credit Suisse, told Bloomberg at the World Economic Forum in Davos. “Things have gotten better since the beginning of the year.” Credit Suisse shares were down 1.2 per cent.
UBS’s investment bank swung to a $47m loss in the fourth quarter from a $46m profit last year due to “challenging conditions” in credit and equities trading, the bank said in a statement on Tuesday.
An improvement in foreign exchange and rates trading revenues offset these slightly, but the investment bank’s revenue was still down more than $200m. Its performance in bond trading was similar to the declines reported by Wall Street rivals, but the drop off in its equities trading revenues contrasted with strong growth at US peers.
UBS chief executive Sergio Ermotti said: “The overall results for the year are clearly not satisfactory, to meet our goals we need to intensify efforts to attract and retain higher portions of our current and prospective clients’ assets.
“We are taking commercial and responsible actions to mitigate the short-term impact of difficult markets . . . and return to our trajectory of growth.”
Mr Ermotti characterised these actions as “fuel-saving mode” and said options open to the bank included hiring fewer new staff, replacing those who leave more gradually and implementing IT projects over a longer period to save costs.
Since taking over in 2011, Mr Ermotti has restructured UBS to focus on managing the assets of the world’s rich, and has reduced the investment bank to a supporting role.
However, the bank has faced pressure to prove it can expand its global wealth management division, which was created last year by merging US and international operations, even in difficult market conditions. The shares fell 29 per cent last year.
On a brighter note, the bank said it bought back SFr750m of shares in 2018, exceeding its target by SFr200m, and it plans to repurchase another $1bn this year.
JPMorgan analyst Kian Abouhossein said: “Investor confidence loss leading to higher volatility, declining equity markets and deleveraging of the ultra-wealthy . . . could be felt in the results. We see these results more a market condition issue rather than a UBS issue.”
The weak results raised questions over UBS’s ability to hit new financial targets it set in October, aiming for growth in pre-tax profits in wealth management at the upper end of its 10 to 15 per cent target in the three years to the end of 2021. It is also targeting 2 to 4 per cent net new money growth per year.
“We had a substantial number of deals pulled in the fourth quarter, the problem is not the pipeline, it is the environment,” Mr Ermotti.
UBS is also wrangling with executive succession after last year losing the high-profile head of its investment bank division, Andrea Orcel, who left to become chief executive of Banco Santander. However, two weeks ago the appointment fell through in a dispute over €50m of deferred pay that he was owed by UBS, which the Spanish bank’s board refused to buy him out of.
Axel Weber, the Swiss bank’s chairman, has said he is looking for external candidates to strengthen the bank’s internal roster of chief executive contenders, and has had talks with former Bank of America Merrill Lynch investment banking chief Christian Meissner about joining as a potential future chief executive.
“In terms of succession, I find it a little bit entertaining as a storyline, a mix of reading my obituary and being like a mosquito in the middle of the summer — something I get the impression you’d like the get rid of,” said Mr Ermotti. “The truth is anything is many years away, we have a process to look at internal and external candidates.”
UBS said the fourth-quarter sell-off in markets would reduce recurring revenues in its wealth management and asset management units.
It added: “Lack of progress in resolving geopolitical tensions, rising protectionism and trade disputes along with increased volatility, which affected investor sentiment and confidence in the second half of the year and particularly in the fourth quarter of 2018, would affect client activity in the first quarter of 2019.”
