UBS lines up US$1.5bil for share buybacks


Better profit: The lender also reported earnings that benefited from increased market volatility and higher transaction-based income. — Reuters

ZURICH: UBS Group AG posted better-than-expected third-quarter profit and set aside US$1.5bil for share buybacks next year as chief executive officer Sergio Ermotti prepares to hand over to Ralph Hamers.

The Zurich-based wealth manager – the world’s largest – followed US banks in reporting earnings that benefited from increased market volatility and higher transaction-based income.

It unexpectedly saw inflows of new money at the private banking business and said provisions in the fourth quarter are set to remain “markedly lower” than in the first half.

Ermotti, one of the longest-serving bank CEOs in Europe, is departing as the Covid-19 pandemic forces lenders to step up cost cuts and reignites consolidation talk.

While the trading rally has helped banks prepare for the prospect of increased bad loans, record new infections in Europe and potential further clampdowns are now clouding the outlook for his successor.

While warning that the recent increase in cases could impact the global recovery, UBS said it expects approval to start buying back shares next year after regulators pushed banks to conserve capital because of the crisis.

UBS also accrued about US$1bil toward its expected 2021 dividend and said it plans to pay the second tranche of its 2019 payment on Nov 27.

Going forward, the bank plans to change the balance between cash dividends and share repurchases compared with previous years, potentially reducing a dividend that’s higher than many Wall Street peers in favour of the greater flexibility of buybacks.

Under Ermotti, Switzerland’s largest bank pivoted away from volatile investment banking and focused on the relatively stable business of wealth management.

That, along with a conservative approach to lending to its richest clients, has shielded its loan book to some extent from the impact of the pandemic.

UBS added US$89mil to its loan loss provisions during the quarter, less than the US$225mil that analysts polled by Bloomberg had estimated.

Net income more than doubled from a year earlier to US$2.1bil – beating analyst estimates. Third quarter results were boosted by gains related to the sale of a fund distribution business and intellectual property rights at the investment bank.

The issue of dividends and share buybacks has become a heated one in Europe.

A few of the stronger banks in the region have started to lobby for a resumption of payouts again to help revive flagging share prices, though regulators have urged the industry to conserve capital.

Within the European Central Bank – which regulates rivals such as Societe Generale SA and Deutsche Bank AG – there’s still uncertainty as to when it will allow banks to resume payments.

More recently, UBS has been seeking a more aggressive approach to lending, hiring Iqbal Khan, the former head of Credit Suisse Group AG’s international wealth management unit, to drive that push.

Khan and his co-head of wealth management, Tom Naratil, announced organisational changes earlier this year that cut down on loan approval processing times and expanded the types of collateral the bank is willing to accept.

UBS is also overhauling the legal structure of its key wealth management unit to free up billions of dollars for lending in higher-growth markets.

The wealth management unit, UBS’s largest contributor of revenue, had been expected to post net outflows of US$262mil during the quarter and instead saw inflows of about US$1.4bil.

The third quarter was still affected by US$5.5bil of tax-related outflows in the United States, where the deadline for filing tax returns was moved to July from April because of the Covid-19 crisis.

Outflows in the Americas totaled US$9.2bil. In addition, a single client in Europe pulled US$4bil out of the bank.

The remainder of outflows was because UBS saw several teams of financial advisers in its wealth unit poached by rivals.

Due to the brokerage business model when advisors leave they take their client assets with them. Still, pre-tax profit did better than expected and the Asia-Pacific region brought in US$10bil in net new money.

Ermotti cut back the investment bank in the wake of a US$2.3bil loss from a trading scandal in 2011 under his predecessor and amid new regulations following the financial crisis.

The shares more than doubled in his first four years, only to give up those gains when negative interest rates weighed on European bank stocks and rivals started to catch up. He leaves unresolved a potential US$5bil French fine for allegedly helping clients evade taxes. — Bloomberg

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