UBS’s clockwork operations are out of sync

When the best-laid plans don't reap the expected returns Keystone

A well-made Swiss watch is a thing of beauty, with countless tiny parts working together to produce a precise, aesthetically pleasing instrument. UBS chief executive Sergio Ermotti has been taking lessons from the watchmakers and has spent the past three years trying to turn his bank into a smoothly performing machine.

Here are the net profits, rising from CHF3.2 billion ($3.5 billion) to CHF3.6 billion last year. That in turn has pushed the tier one capital ratio up to a healthy 13.4%. And as a consequence of that strong capital position, UBS doubled the regular dividend to 50c and will also make a 25c special payout. Just like clockwork.

But somehow the mechanism is not quite working as it should.

The number on the front of the dial is showing a 7.2% return on equity for 2014. UBS had promised 15% from 2015 onwards. This watch looks slow.

So get out the loupe and look at what is gumming up the system. There are some familiar problems. The charges for litigation rose from CHF1.7 billion in 2013 to CHF2.5 billion in 2014. Overall costs are looking sticky – the cost to income ratio increased from 88% to 91%.

And there are some new imperfections in the mechanics. Risk weighted assets in the investment bank, which Mr Ermotti has been cutting back, are starting to tick up again. That is partly due to exchange rates and technical changes, but it is a worrying sign.

More seriously, the recent appreciation of the Swiss Franc will hurt returns in UBS’s wealth management business – two-thirds of its costs are in the domestic currency but only one-third of its income. And lower Swiss interest rates will damage net interest margins.

So Mr Ermotti has reset the watch. The bank’s return on equity targets have now become return on tangible equity targets (as tangible equity is lower, it should be easier to hit double digits). ROTE was 8.4% last year. If all goes well that should tick along to 10% this year and 15% from 2016. But there might still be more tinkering to be done.

Copyright The Financial Times Limited 2015