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UBS Lines up $1.5 Billion for Buybacks 

This content was published on October 20, 2020 - 07:06

(Bloomberg) -- UBS Group AG posted better-than-expected third-quarter profit and set aside $1.5 billion for share buybacks next year as Chief Executive Officer Sergio Ermotti prepares to hand over to Ralph Hamers.

The Zurich-based wealth manager -- the world’s largest -- followed U.S. banks in reporting earnings that benefited from increased market volatility and higher transaction-based income. It also unexpectedly saw inflows of new money at the private banking business and said fourth-quarter provisions are set to remain “markedly lower” than in the first half.

Ermotti, one of the longest-serving bank CEOs in Europe, is departing as the Covid-19 pandemic forces lenders to step up cost cuts and reignites consolidation talk. While the trading rally has helped banks prepare for the prospect of increased bad loans, record new infections in Europe and potential further clampdowns are now clouding the outlook for his successor.

While warning that the recent increase in cases could impact the global recovery, UBS said it expects approval to start buying back shares next year after regulators pushed banks to conserve capital because of the crisis. UBS also accrued about $1 billion toward its expected 2021 dividend and said it plans to pay the second tranche of its 2019 payment on Nov. 27.

Here are key highlights of third-quarter earnings:

  • Net income of $2.1b vs estimate of $1.55b
  • Global wealth management pretax profit $1.06 billion vs estimates of $912.4 million
  • Investment bank pre-tax profit $632m vs $177m estimate
  • Cost-to-income ratio of 70.4% vs 75%-78% target

Going forward, the bank plans to change the balance between cash dividends and share repurchases compared with previous years, potentially reducing a dividend that’s higher than many Wall Street peers in favor of the greater flexibility of buybacks.

Under Ermotti, Switzerland’s largest bank pivoted away from volatile investment banking and focused on the relatively stable business of wealth management. That, along with a conservative approach to lending to its richest clients, has shielded its loan book to some extent from the impact of the pandemic. UBS added $89 million to its loan loss provisions during the quarter, less than the $225 million that analysts polled by Bloomberg had estimated.

Net income about doubled from a year earlier. Third quarter results were boosted by one-off gains related to the sale of a fund distribution business and intellectual property rights at the investment bank.

The issue of dividends and share buybacks has become a heated one in Europe. A few of the stronger banks in the region have started to lobby for a resumption of payouts again to help revive flagging share prices, though regulators have urged the industry to conserve capital. Within the European Central Bank -- which regulates rivals such as Societe Generale SA and Deutsche Bank AG -- there’s still uncertainty as to when it will allow banks to resume payments.

“The fact that we are highlighting what we would have done so far this year, by creating this $1.5 billion reserve is a testament of our commitment,” on returns, Ermotti said in a Bloomberg Television interview. “In respect of timing, I think it’s not realistic at this stage considering the overall regulatory environment and restrictions worldwide to see something until the early part of 2021.”

UBS rose as much as 2.8% in early Zurich trading, paring this year’s decline to about 7%.

More recently, UBS has been seeking a more aggressive approach to lending, hiring Iqbal Khan, the former head of Credit Suisse Group AG’s international wealth management unit, to drive that push. Khan and his co-head of wealth management, Tom Naratil, announced organizational changes earlier this year that cut down on loan approval processing times and expanded the types of collateral the bank is willing to accept. UBS is also overhauling the legal structure of its key wealth management unit to free up billions of dollars for lending in higher-growth markets.

The wealth management unit, UBS’s largest contributor of revenue, had been expected to post net outflows of $262 million during the quarter and instead saw inflows of about $1.4 billion. The third quarter was still affected by $5.5 billion of tax-related outflows in the U.S., where the deadline for filing tax returns was moved to July from April because of the Covid-19 crisis. Outflows in the Americas totaled $9.2 billion. In addition, a single client in Europe pulled $4 billion out of the bank.

The remainder of outflows was because UBS saw several teams of financial advisors in its wealth unit poached by rivals. Due to the brokerage business model, when advisors leave they take their client assets with them. Still, pre-tax profit athe the business did better than expected and the Asia-Pacific region brought in $10 billion of net new money.

Ermotti cut back the investment bank in the wake of a $2.3 billion loss from a trading scandal in 2011 under his predecessor and amid new regulations following the financial crisis. The shares more than doubled in his first four years, only to give up those gains when negative interest rates weighed on European bank stocks and rivals started to catch up. He leaves unresolved a potential $5 billion French fine for allegedly helping clients evade taxes.

The pandemic has reignited talk of mergers in European banking, with lenders in Spain and Italy striking deals this year. UBS’s Chairman Axel Weber has drawn up a list of possible partners including Deutsche Bank AG, BNP Paribas SA, and Credit Suisse, people familiar with the matter have said. While Weber said publicly that UBS isn’t looking for a bride, he and other European bank leaders have long acknowledged the need for consolidation.

Other key highlights from UBS’s third-quarter results:

  • Fixed income and currency revenue keeps pace with top Wall Street peers
  • Ermotti says very confident on quality of credit book
  • Says covid situation makes it difficult to make reliable predictions

(Adds Ermotti comment in 10th paragraph, shares in 11th)

©2020 Bloomberg L.P.

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