Breakingviews - UBS limp new targets invite investor scorn

UBS CEO Sergio Ermotti attends the Swiss Global Digital Summit in Geneva, Switzerland, September 2, 2019.

LONDON (Reuters Breakingviews) - Sergio Ermotti is suffering from either an excess of realism, or a lack of ambition. The UBS chief executive issued relatively vague returns targets for the $46 billion Swiss lender. Unless the bank’s planned expansion in wealth management supercharges its top line, Ermotti or his successor will have to belatedly wield the axe.

The lender raked in $4.3 billion of earnings last year, equivalent to a 12.4% return on common equity Tier 1 capital – a big miss compared with a previous 15% goal. Ermotti seems determined not to undershoot again: his new ambition for the 2020 to 2022 period is for a return on CET1 capital between 12% and 15%.

That’s both vague and unambitious. At the bottom end, investors would have no reason to expect their shares to rise. UBS trades at 1.3 times its end-2019 CET1 capital, implying shareholders are already pencilling in a 13% return, if the bank’s cost of equity is around 10%. At the top-end 15% target, UBS’s equity should be worth $58 billion by the end of 2022. That would represent a modest 8.5% annualised price increase from today’s level.

Ermotti appears to be passing up a clear opportunity to slash expenses, which at UBS are a relatively high 80% of revenue. He’s gunning for a 75%-78% cost-income ratio from 2020 to 2022. Assume revenue in three years’ time is roughly $30 billion, as analysts expect. On that basis, even the most aggressive 75% expense target would imply a meagre $812 million of cuts over the period, or 3.5% of last year’s cost base.

There are two explanations for Ermotti’s uninspiring vision for 2022. First, he’s simply being realistic about persistent low interest rates, which squeeze lenders’ profits. Second, he’s more focused on boosting UBS’s main wealth-management business, and so is wary of sacrificing growth by cutting costs too aggressively.

That may prove wise if the division’s new co-head Iqbal Khan successfully cranks up lending to wealthy clients and moves more of them out of cash. If not, UBS will be stuck with a bloated cost base and slow growth in a few years’ time. It would then have to hack back expenses to keep earnings growing. Ermotti, who has been chief executive since 2011, may not be around to do the hard work.


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