When is good not enough? UBS is finding out after solid third-quarter results failed to enthuse investors. finews.com looks at why.
«Reports of my death have been greatly exaggerated,» Mark Twain famously said when confronted with «fake news» of his demise. The trope could apply just as much to UBS, which came up short on Friday despite delivering a 14 percent rise in profit.
UBS in on track with many of its targets, but despite delivering a «strong beat» of expectations this morning, is being shunned by investors. Why? A closer look reveals a zero-sum game on several levels.
«Unpredictable» Fixtures
The Swiss bank has had trouble in recent quarters kickstarting its revenue. UBS has undergone round after round of cost-cutting, but much of that money has gone back out the door for regulatory, compliance and information technology expenditure – a zero-sum game. The bank keeps a cash pile going for regular «unexpecteds» like penalties and legal settlements – uncertainty which investors hate.
UBS' headcount has been lowered by several thousand in recent years, a logical development considering the effect that digitization will have on many finance jobs. At the same time, UBS is snapping up contractors in order to be more flexible about personnel spending.
Favorable Conditions
UBS is the undisputed number-one wealth manager by size, and managed to hoover up new assets at a brisk clip in Switzerland or growth market Asia. But much of the rise in managed assets has to do with higher short-term U.S. dollar interest rates and a «Trump bump».
So far, UBS' private bank is notching wins from general market conditions and its size, and not from anything in particular it is doing very well. For example, UBS is also losing money in some places such as emerging markets, where it recorded withdrawals from wealthy clients in the quarter.
What is UBS' private bank doing well? Asia: it added 20 private bankers in the region during the quarter, and is poised to ride the growth wave sweeping through. But even this smart positioning isn't enough to be considered particularly innovative. UBS will be hoping to transform its excellent relationships in China and other regional growth markets into lucrative business.
Better Reputation
Chief Executive Sergio Ermotti seems to realize he needs to do more for shareholders, telling «Bloomberg» he is thinking of augmenting the bank's 50 percent profit payout with a share buyback program. This would kickstart the share price – a notorious pet peeve of Ermotti's.
A share buyback is often a ploy to bolster results, and a tacit admission to investors that a company has run out of ideas on what else to do with its cash. A better alternative would be for the bank to achieve sustainable revenue and profit growth through its operating business, and not by slashing costs and buying back its own shares.
No doubt – UBS is on solid ground, with little to indicate that it is about to hit a wall of potential dangers and risks. But the same can be said of other big European blue-chips in less regulated and cheaper sectors than finance which are, thanks to more sustainable, innovative and reputable methods, prepared to outpace their peers – like Nestle or Unilever, to cite two examples.
