Zurich The situation of the European banks has not gotten any easier in the past few weeks. In addition to the geopolitical risks and concerns about inflation, fears of a serious economic crisis have also emerged. This mix also affects the business of UBS, which presented its figures on Tuesday as the first major European bank.
The Swiss achieved a net profit of 2.1 billion dollars in the second quarter, five percent more than in the same quarter last year and the highest value in ten years. But a large part of the profit is due to proceeds from the sale of a stake in Japan.
UBS also missed the expectations of analysts, who had forecast net profits of $2.4 billion on average. By Tuesday afternoon, the stock had lost more than 6 percent in value. “The second quarter was one of the most difficult phases for investors in the past ten years,” stated CEO Ralph Hamers.
This is a finding that should also apply to other European banks. While many analysts are still anticipating good results for the second quarter, they fear that the outlook will deteriorate significantly. “Performance should have held up relatively well over the first half of the year,” Giles Edwards of rating agency Standard & Poor’s told Reuters.
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“The question is whether there will be early warning indicators that pressure is building,” explains Edwards. “We expect pessimistic forecasts in the second half of the year into next year.”
Deutsche Bank will follow on Wednesday with its quarterly figures. S&P warns that the risks for German financial institutions have increased since the spring. Because of the growing risk of recession, banks would have to reckon with significantly more non-performing loans and rising borrowing costs.
For Deutsche Bank, analysts have lowered their second-quarter earnings and revenue expectations over the past two months, while raising their forecasts for expenses and provisions for credit losses. “For Deutsche Bank, a deeper recession would mean the greatest risk,” warns Michael Rohr of the rating agency Moody’s.
On average, the analysts anticipate risk provisions of EUR 1.4 billion by the end of this year, almost three times as much as in the previous year. The bank intends to complete its large-scale restructuring by the end of the year. CEO Christian Sewing has promised investors a return on tangible equity of eight percent by then. On average, however, the analysts only consider a good six percent to be realistic.
Significant minus in the most important business areas
In the second quarter, UBS had to cope with a double-digit decline in pre-tax profit in its most important business areas: In wealth management, the pre-tax profit went downwins back by eleven percent compared to the same period last year to almost 1.2 billion dollars.
Higher interest income was swallowed up by lower fee income and weaker trading activity. “Our private customers are on the sidelines with their investments and are looking for orientation,” explained Hamers.
UBS is not alone with these problems. Zurich-based competitor Julius Baer announced a hiring freeze and austerity program on Monday.
The business of UBS in investment banking collapsed even more – there sank pre-tax profit increased 39 percent to $410 million. In particular, the business with IPOs and share placements has practically come to a standstill and has yielded 70 percent less than in the second quarter of the previous year.
The consulting business for mergers and acquisitions is also weakening, only the derivatives and trading business was able to increase by around ten percent. According to Hamers, this is thanks to the strong trading activity of professional investors, who trade a lot in a volatile market environment.
UBS is keeping its US competition at bay
Kian Abouhossein, banking analyst at JP Morgan, warned that US banks were widening their gap to Swiss competitors: “UBS has underperformed its US peers in investment banking and has lagged behind Morgan Stanley in asset management.” most comparable to UBS.
UBS had to cope with cash outflows of 3.5 billion dollars in US wealth management. In addition, the expense ratio in the region rose to over 90 percent. This weakens the area from which the UBS boss expects the greatest growth for the bank.
Hamers, however, appeased that the wealthy clientele in the USA withdrew funds primarily because these customers had to shoulder a higher tax burden. The inflows into specialized investment solutions are high, for example outside of the stock exchanges in so-called private markets.
In business with professional clients (asset management), UBS was able to record a leap in profits through the sale of its stake in a joint venture. But without the deal, the decline in pre-tax profit would have been a whopping 56 percent.
In addition, the stable Swiss business is also slowing down. There, UBS had already recorded smaller loan defaults in the tens of millions after being able to reduce the provisions for bad loans in the same quarter of the previous year.
And in the head office, the so-called Group Functions, a surprisingly high loss of over 300 million dollars was incurred. UBS boss Hamers wants to reduce this amount to zero in the medium term. Anke Reingen, analyst at RBC Capital Markets, wrote in a recent study that UBS had fallen short of expectations on many fronts.
UBS costs fall slightly
UBS is still heavily capitalized, with a Common Equity Tier 1 ratio of 14.2 percent. UBS boss Ralph Hamers also still has the costs under control: They fell slightly to 70.6 percent. However, without the special effect from the sale of the stake in Japan, the expense ratio would be above the target corridor of 70 to 73 percent, several analysts noted.
In addition, the environment is not getting any easier for banks, as Andreas Venditti, analyst at Vontobel, emphasizes: “The uncertainty will continue to weigh on customer sentiment.” Therefore, the rich and super-rich clientele of UBS will also be reluctant to make transactions in the following quarter , he expects.
After all: Venditti certifies UBS that the results in the most important division, wealth management, are in line with expectations. The slump in investment banking and the increase in loan defaults mean that there is little hope for UBS’s competitors either.
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