LONDON (Reuters Breakingviews) - UBS has sounded the end of an era on a bum note. A quarterly pre-tax loss at the lender’s investment bank coincided with the sudden departure of chief rainmaker Andrea Orcel, while market declines saw wealth management profit fall sharply. Still, as long as Chef Executive Sergio Ermotti can stick to his cost-cutting targets the group should be able to manage volatile conditions better than peers.
The investment bank’s $47 million pre-tax loss in the fourth quarter was its first in over four years. But the fact that under Orcel UBS shifted its focus towards equities and advisory – to the detriment of fixed income – meant it benefited from a buoyant first nine months of 2018. As a result, the division’s annual return on equity increased by nearly three percentage points to 16 percent.
Potentially more worrying was a 2 percent year-on-year decline in underlying pre-tax profit at global wealth management – weighed down by a one-fifth drop in the final quarter – which accounts for around two-thirds of earnings. Lower profitability was mostly down to a 6 percent year-on-year fall in invested assets as market volatility caused clients to move their funds to low-margin cash.
Ermotti admitted that ongoing political and economic ructions, such as trade wars and Brexit, were likely to present “profit growth headwinds”. And, as the credit cycle turns, asset prices may stay volatile, and investment banking revenue stagnate. Even if his two main businesses struggle, Ermotti can at least cut costs, which at 79 percent of revenue are still high relative to some wealth management peers.
Assume that growing the top line gets harder and revenue flatlines over the next three years. Simply trimming expenses at the same 2 percent that Ermotti managed this year would bring UBS’s cost-to-income ratio from 78 percent presently to 74 percent. The bank’s return on tangible equity would rise by around two percentage points to 13 percent, according to a Breakingviews calculation which assumes a 20 percent tax rate and projected tangible book value of $48.3 billion. That should allow Ermotti to continue share buybacks, with $1 billion earmarked for 2019.
A 4 percent decline in the share price on Tuesday suggests investors are more worried about the short term, leaving UBS shares valued at just over its tangible book value. However, even with greater market volatility, cost-cutting should allow Ermotti to grow that premium.
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