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An illuminated sign hangs above the entrance to the UBS Group AG headquarters in Zurich, Switzerland. Photographer: Michele Limina/Bloomberg

(bloomberg)

(Bloomberg) -- UBS Group AG’s newly combined wealth-management business and investment bank are helping Chief Executive Officer Sergio Ermotti boost growth after investors questioned the lender’s commitment to higher returns.

The private banking unit -- which counts many of the world’s billionaires among its clients -- took in more fees and interest income in the second quarter while bringing down costs, even as UBS unexpectedly saw money leave the firm. At the investment bank, surging equities and foreign-exchange trading helped the unit led by Andrea Orcel beat estimates.

Ermotti said UBS has begun to cut costs in wealth management following the merger of the U.S. and international division into one super-unit that manages about $2.4 trillion. While the business is producing steady profits, the lender rejigged financial targets this year after investors argued Ermotti should do more to improve returns after the shares languished.

UBS shares rose the most since April after the results were released on Tuesday, gaining as much as 4.2 percent in Zurich.

“Higher quality revenue streams in global wealth management and the ability to generate capital in unfavorable market conditions bodes well for the share price,” Tom Hallett, an analyst at Keefe Bruyette & Woods Inc. in London said by email. “The prospect of further capital return is likely.”

Higher profit at global wealth management helped compensate for the surprise withdrawal of assets by clients, including about 9 billion francs ($9.1 billion) related to tax-related withdrawals in the U.S. and a corporate employee share program. It’s the first time since the end of 2016 that the bank has lost assets on a net basis.

Investment Bank

The investment bank posted pretax profit of 569 million francs, beating the average estimate for 397 million francs. Revenue from equities, foreign exchange and credit trading helped fuel gains as UBS benefited from similar trends to U.S. rivals.

After pressure from investors, Ermotti changed the bank’s targets earlier this year, committing to buy back stock, targeting growth in net new money and pledging to meet a cost-to-income ratio of under 75 percent for the group. Outflows won’t stop the bank from meeting its targets for new assets this year, Ermotti said in a Bloomberg Television interview.

In a nod to analysts and investors who had argued that the targets were too conservative and that the bank had more room for repurchases, the CEO said the bank plans to further update investors on strategy execution in October. So far, it has bought back 550 million francs of stock this year while at the same time increasing its CET1 ratio -- a key financial metric -- above estimates. That could allow the bank more room to increase buybacks.

“Results are stronger due to excellent revenue generation in core divisions," analysts at JPMorgan Chase & Co. led by Kian Abouhossein wrote in a note to clients. “But we believe UBS still needs to be more aggressive and ambitious in its cost management discipline."

Wealth Merger

To benefit from the same synergies as U.S. rivals -- with pooled infrastructure and clientele -- Ermotti in January tasked Tom Naratil, head of the U.S. wealth business, and Martin Blessing, former chief executive officer of Commerzbank AG, with the merger. The unit is now known as global wealth management, after the surprise departure of Juerg Zeltner.

UBS scaled back its investment bank after the financial crisis. The lender has cut the amount of capital allocated to the investment bank, focusing on areas such as equities, foreign exchange and advisory services. Moody’s boosted its credit rating for UBS’s main unit last month, which said that the restructured investment bank and wealth-management business should help the lender weather a market downturn.

“We regard the results as a positive,” Javier Lodeiro, an analyst at Zuercher Kantonalbank, said in a note to clients. “Even if net new money disappointed and global wealth management didn’t really deliver a positive surprise.”

Other highlights of the earnings included:

  • Equities adjusted revenue rises 17 percent
  • Net income 1.28 billion francs versus estimates of 1.09 billion.
  • Adjusted cost to income ratio of 74 percent at wealth management
  • Bank has bought back 550 million francs of stock so far
  • Plans to cut 100 million francs of costs in wealth management

To contact the reporters on this story: Patrick Winters in Zurich at pwinters3@bloomberg.net;Jan-Henrik Förster in Zurich at jforster20@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Andrew Blackman

©2018 Bloomberg L.P.

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