The rift between the US (where rates are still positive) and European banks (where rates have never been more negative) continues to grow.
While US banks have so far reported mostly better than expected results for Q4, the same can not be said for Europe, where UBS shares are down 5% as the bank misses fiscal year profitability and cost targets in addition to trimming its mid-term goals. As Saxobank notes, "UBS has been hit by wealth management outflows, negative rates and poor performance in its investment banking division" and notes that "this obviously sends a warning to investors if they thought overweight European banks was a good idea." To be sure, negative rates will continue to haunt European banks until the ECB changes its mind on negative rates.
It's not just NIRP though: the great conundrum of 2019 struck again, because even as stocks hit all time highs, the largest Swiss bank missed key targets for 2019 as investors pulled money late in the year when stocks were soaring, underscoring the challenge for new wealth management co-head Iqbal Khan as he seeks to turn around its most important business.
As Bloomberg reports, the Swiss bank failed to meet several metrics set during a revamp of its goals just over a year ago, highlighting mounting headwinds for European lenders while U.S. rivals post record profits. The downgrades were across the board - on profit, cost efficiency and dividend growth - while the private bank unexpectedly saw $4.7 billion of outflows last quarter.
The lower targets, and higher outflows overshadowed a strong finish to the year in which the bank posted better than expected net income and investment banking results while boosting its core financial strength. UBS also gave a moderately positive outlook for the first quarter, saying client activity is picking up and the favorable credit environment and partial resolution of trade disputes should help mitigate slowing global economic growth.
Here are the key numbers and new targets from UBS’s results:
- Wealth management outflows of $4.7 billion driven by Americas
- Return on CET1 capital of 12.4% in 2019 below 15% target.
- Now targeting CET1 capital metric at 12%-15% to 2020-2022
- Adjusted cost-to-income ratio of 78.9% missed target of 77%
- Now targeting cost-to-income metric at 75%-78%
- 1 cent a share dividend rise going forward; had sought mid-to-high single digit percent
- $722 million net income beats company compiled estimate of $682 million
The downgrades marked a reversal for CEO Sergio Ermotti after he restructure goals in Oct. 2018 under pressure from investors. To help restore the bank’s edge and strengthen the bench of potential CEO successors, Ermotti in in October brought in Khan from Credit Suisse. The new executive is cutting jobs, speeding up decision making and giving more autonomy to the regions in an effort to revive the wealth business.
UBS joins other European bank giants such as Credit Suisse and Deutsche Bank in dialing back its ambitions in an era of negative rates, investor caution and escalating trade tensions. Last month the largest German bank warned that its mid-term profitability goal now appears to be “more ambitious,” and it will rely more on volatile investment banking to reach its revenue target; it also slashed banker bonuses by up to 30%, while Italy’s UniCredit SpA is cutting 8,000 jobs as part of its new multi-year plan to boost returns in the face of limited growth prospects.
UBS shares declined as much as 5.9%, the biggest one-day drop since May.