LONDON, April 25 (Reuters Breakingviews) - UBS’s (UBSG.S) old strategy under former CEO Ralph Hamers was safe but not particularly rewarding. Its new one under returning boss Sergio Ermotti is exactly the opposite. There’s much for shareholders to worry about in the emergency rescue of Credit Suisse (CSGN.S). But UBS’s slowing growth makes cost-saving dealmaking the natural next step.
First-quarter results on Tuesday underscored the problems for the $60 billion bank’s erstwhile standalone plan. Group revenue shrank 7% year-on-year during the three months to March 31. In its core wealth-management business, the top line fell 2%. The uplift from investing rich clients’ cash into high-yielding securities seems to be petering out, as customers now expect to earn juicier rates themselves.
True, the wealth business pulled in about $20 billion of new fee-paying assets in the first quarter. Yet UBS is so big that it’s hard to move the needle: the new money is just 0.7% of total client funds including deposits. Another issue is that private bankers seem to be squeezing less revenue from each dollar they handle. The revenue UBS generates in wealth management fell to 78 basis points of average fee-earning assets in the first quarter, from 82 basis points a year ago.
That’s why Hamers’ vision was well past its sell-by date. His plan relied on organic growth, while talking up the benefits of embracing financial technology. The first part is clearly lacking, while the second was always fuzzy – especially after UBS cancelled the acquisition of fintech Wealthfront last year.
The second Ermotti era, by contrast, at least offers the chance of some upside. UBS reckons it can eventually wring $8 billion of annual cost savings from the combination with Credit Suisse. Deduct tax at 24%, capitalise using a 10% discount rate, and those savings are worth $60 billion in today’s money – roughly in line with UBS’s market value. The deal also creates a global wealth giant with $3.5 trillion of assets, as of March 31, second only to Morgan Stanley (MS.N). That could eventually put UBS in a position to scoop up smaller peers in countries where it currently lags, such as the United States.
Integrating two large banks is always fraught, particularly when one of them has just had a near-death experience. But Ermotti has pulled off a tough restructuring in the past, when he slashed UBS’s investment bank. The group’s latest reinvention as a cost-slashing consolidator is a risky pivot, but it looks like a more logical and lucrative fit for the slow-growing Swiss giant.
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CONTEXT NEWS
UBS on April 25 said it generated $8.7 billion of revenue in the first quarter of 2023, which was 7% lower than in the same period a year earlier.
The core wealth management business reported a 2% year-on-year decline in revenue, which was a slightly steeper fall than the 0.5% drop that analysts were expecting on average, according to company-complied consensus estimates.
Shares in UBS were down 2.6% to 17.72 Swiss francs as of 0921 GMT on April 25.
