UBS warns earnings may take a hit amid pandemic

The bank's first-quarter profit jumped 40%, while wealth management business took in $12 billion in net new money

UBS Group expressed confidence that it can withstand a surge in bad loans while warning that the unprecedented outbreak will put pressure on key streams of income at its wealth management business.

The bank — which posted a 40% jump in profit to $1.6 billion during the first quarter — said falling asset prices will erode recurring fee income while low interest rates hit lending income. Despite an expected drop in client activity, UBS indicated the “high quality” of its credit portfolio may shield it from more widespread defaults.

“We can be relatively optimistic about the extent to which credit losses will impact our future,” Chief Executive Sergio Ermotti said in an interview. “Our business model sees a high degree of concentration in lending exposure in Switzerland and in general to asset-based lending, so where we have a high degree of underlying guarantees.”

Net new money at UBS’ wealth management business in the first quarter was $12 billion, or $28 billion before $16 billion of outflows related to its program to charge for deposits. Still, invested assets had declined 11% by the end of the quarter because of the global market sell-off. Ermotti warned this could mean a contraction of $200 million to $250 million in net recurring fee income.

Lending push

“On recurring fees, it depends very much on where asset levels will be, particularly equity markets,” Ermotti said. “The starting point” for the second quarter “is lower.”

UBS, which last year hired Iqbal Khan from Credit Suisse Group to boost its wealth business, managed to push ahead with a strategy to lend more to rich clients, netting $3.9 billion new loans in the quarter. But margins will be dented as lower interest rates, particularly in the U.S., start to have an impact.

While UBS scaled back securities trading since the financial crisis, its investment bank still benefited from volatility in the quarter that also lifted Wall Street firms. Equities trading at its global markets business rose 18% from a year earlier, and fixed income revenue almost doubled.

The bank’s focus on managing assets for the wealthy has left it with limited risk from corporate and consumer defaults that now threaten European and U.S. peers, allowing it to put less aside for future losses and post one of its most profitable quarters in years. UBS provisioned just $268 million for bad loans during the quarter, a fraction of its competitors.

Santander, HSBC

Banco Santander said Tuesday it’s setting aside 3.9 billion euros ($4.2 billion), and HSBC Holdings will take its biggest charge for bad debt in almost nine years, reporting provisions of $3 billion in the first quarter.

UBS rose 3.6% at 9:14 a.m. in Zurich trading, leading European bank shares higher. HSBC fell while Santander was little changed.

“UBS results are strong,” analysts Kian Abouhossein and Amit Ranjan at JPMorgan Chase & Co. wrote in a note.

Earlier this month, UBS said it expected first-quarter profit to be around $1.5 billion, surprising analysts who had expected a lower figure. While the amount the bank is setting aside for bad loans is low compared with peers, it’s still the highest since the financial crisis.

Touting strength across its businesses, the bank is now contending with an economic contraction of as much as 15% in the euro region this year and uncertainty about the duration of the lockdown in key markets, including the U.S.

A key measure of capital strength fell in the first quarter, the result of higher risks on the balance sheet.

Elevator deal

The investment bank took a $183 million write-down on its leveraged capital markets, corporate lending and real estate finance portfolios, though related hedges more than offset that. UBS is an underwriter on the buyout of Thyssenkrupp’s elevator division, the largest such deal in Europe in a decade. When the pandemic hit, banks that had promised to provide financing were left unable to sell the debt in the market. Credit Suisse took $293 million in writedowns for such deals.

Other key highlights from UBS’s first-quarter results:
• Global wealth management pretax profit $1.22 billion, up 41%
• Investment bank pretax profit $708 million, up 242%
• Personal and corporate banking pretax profit 322 million francs, down 16%
• Asset management pretax profit $157 million, up 52%; inflows of $33 billion

[More: Billionaire clients at UBS keen on turnaround opportunities]