By Christopher Thompson
LONDON (Reuters Breakingviews) - UBS has reaffirmed its familiar exalted position in the European bank pecking order. The Swiss lender’s investment bank earned a 24 percent return on equity in the three months to end-March. One driver of its status is management’s decision back in 2012 to cut fixed income trading, which came up trumps. The other is the haplessness of rivals.
February’s surge in equity volatility automatically helped revenues at the equities-focused UBS jump a quarter year-on-year in U.S. dollar terms, roughly in line with stateside peers that have reported. Capital markets revenue rose 22 percent, too, in dollars. But fixed income, currencies and rates trading revenues dropped 6 percent, driven by lower volatility relative to equities. That doesn’t augur well for ailing bond powerhouse Deutsche Bank – nor Credit Suisse or Barclays which are also more fixed income-focused.
Elsewhere, diluted earnings per share of 0.39 Swiss francs was broadly in line with analysts’ consensus. The revamped global wealth management division – into which US wealth management was recently folded – delivered an underlying 7 percent year-on-year increase in pre-tax profit as higher fees and net interest income from more client lending helped offset net margin pressure.
Wealth management, UBS’s flagship, isn’t quite firing on all cylinders. At 73 percent of income, the division’s expenses sit at the top end of UBS’s preferred range, and well away from a 65 percent cost-to-income target. That has prompted the bank to enter into discussions with peers, including Credit Suisse, about sharing some back-office functions such as payments, compliance and trade settlement. The fact that benefits are likely years away shouldn’t be a problem as long as UBS’s capacity to attract rich people’s money – the lender reported 19 billion in net quarterly inflows – doesn’t diminish.
True, the investment bank’s outperformance is unlikely to be repeated in the typically more mundane second quarter. And volatility remains muted despite a spike in February. UBS shares fell by 4 percent on Monday, perhaps also reflecting Ermotti’s oblique warning about geopolitical tensions adversely impacting investor confidence. Still, UBS’s ability to make a group return on tangible equity of 13.6 percent highlights why it trades well above book value, when Deutsche Bank and Barclays languish well below theirs.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.