UBS, the largest manager of rich people’s money in the world, showed unexpected weakness in its main business in the fourth quarter. Why does the Swiss giant appear helpless in private banking?

The Zurich-based wealth manager failed at crunch time: its private bank spent more than it took in during the fourth quarter, bled client money including the loss of a $2.6 billion client, and slipped in lucrative mandates. Overall, the bank’s profit before tax of $793 million just shades last year’s $791 million.

The torrent of bad news is bitter for UBS, which has built its strategy around wealth management as a more resilient deliverer of profits – regardless of market conditions – than investment banking (which also slumped).

So what went wrong this quarter? UBS explained the withdrawals in part with Asian clients deleveraging – or battening down the hatches, financially. Swiss and American clients also fled. Notably, UBS lost $3.5 billion in funds from so-called ultra-high net worth clients, or the lucrative $50 million-and-up segment which UBS is desperate to cultivate under veteran banker Joe Stadler.

Bulky and Beset 

The bad news doesn’t end there: UBS’ efforts to lock clients into mandates – more predictably lucrative for the bank – slipped to 33.6 percent, from nearly 34 percent. All this wouldn’t be particularly worrying if UBS was in fighting shape otherwise, but the bank’s wealth arm is bulky and still beset by scandals from the past.

UBS’ cost-income ratio in private banking stood at a whopping 80.7 percent, compared to 68.9 percent at cross-town rival Credit Suisse (which to be fair doesn’t include Asia, which would weigh down the metric, in the calculation). At Julius Baer, CEO Bernhard Hodler flagged spending cuts after the bank’s cost-income ratio bounced out of a 64 to 68 percent range.

Its the Income, Stupid

To be sure, UBS (and Julius Baer’s) problem is not just spending: it is income. UBS’ plan for that is largely reactive: «Further improvements in market levels, as well as improvements in investor sentiment and client activity would contribute to mitigating revenue and profit growth headwinds,» the bank said in its outlook on Tuesday.

What it doesn’t seem to fully realize, unlike Julius Baer which scrambled to respond, that it can’t just wait for the stars to align and revenue to kick in. This is especially true with its spending strained by additional reserves, probably for a messy French probe. No matter what the judgement from Paris judges next month, the defeated side is all but sure to appeal, drawing the proceedings out for months if not years more.

«UBS' global wealth management, despite numerous initiatives to improve it, still operates with a worrying cost-income ratio of around 80 percent, which makes it a prime target for potential competitors with a leaner infrastructure,» according to Axel Pierron, managing director of consultancy Opimas.

Deeper Cuts Needed?

Despite the sturdy private banking strategy, UBS is vulnerable because it cannot inoculate itself against the vagaries of markets and whims of clients. The latest quarter illustrated that UBS cannot always count on its investment banking arm to salvage profits as it did last quarter.

Are deeper cuts needed? Martin Blessing and Tom Naratil who took over the unit one year ago, have shied away from a Tidjane Thiam and Credit Suisse-style bloodletting so far. They may not get around it any longer.