October 25, 2018 / 8:47 AM / 10 months ago

Breakingviews - UBS stoops to conquer

A man walks past a logo of Swiss bank UBS in Zurich October 30, 2012. REUTERS/Arnd Wiegmann

LONDON (Reuters Breakingviews) - The recent departure of UBS’s key rainmaker Andrea Orcel may have left some observers convinced that boss Sergio Ermotti now has an alluring opportunity to shrink the investment bank in favour of more highly rated wealth management. If so, they had better think again.

The Swiss lender, which reported third-quarter earnings on Thursday, implicitly reaffirmed the importance of its mostly advisory and equities business by focusing on cost control to boost profitability. It’s also ditching a standard industry way of measuring performance in favour of one that will automatically make returns look higher.

It’s easier for Ermotti to face down investment-banking critics when your rainmakers regularly outperform European peers with double-digit returns. The third quarter was no different – thanks to a good showing by its credit and equities traders, the investment bank made an impressive 19 percent return on tangible equity. Still, that compares to a global wealth management division which pumps out more than double that.

The bank’s strategic update, though, focused on cost control – the lender targets a 72 percent ratio of expenses to income by 2021, compared to 75 percent previously – and higher shareholder payouts. UBS also wants to change preferred returns metrics until 2021 to what it calls a more “simple, transparent” return against common equity Tier 1 capital, rather than against tangible equity.

But it’s only targeting a 15 percent return by that metric for next year – the same, after adjusting from its tangible equity target, that it’s already forecast to hit that this year.

An “ambition” of increasing that to 17 percent by 2021 also looks achievable if UBS grows the top line by just 2 percent a year and keeps costs in line, assuming an annual increase in common equity Tier 1 of 4.5 percent from 34.1 billion Swiss francs currently, according to a Breakingviews calculation.

By any measure, those are solid returns. But switching to a more flattering way to track returns smacks of trying to mask a lack of growth.


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