UBS Slides As Net Profit Halved, Despite Wealthy Client Inflow

UBS’s Swiss-listed shares slid in early Tuesday trading after the bank posted a 52% year-on-year decrease in net profit in the first quarter. Despite the slump, the bank recorded strong customer inflows while preparing to acquire rival Credit Suisse. This marks the first financial results since UBS announced the takeover of Credit Suisse last month. 

UBS disclosed its weakest quarterly earnings in more than three years and a dim outlook for interest income in its wealth management division. It said net profit came in at $1.03 billion for the first quarter, missing analyst expectations of around $1.75 billion for the period. 

Switzerland’s largest bank experienced a $665 million hit in net income due to US residential mortgage-backed securities litigation. It also said it’s in talks with the US Department of Justice to settle a 2018 civil complaint. 

That news overshadowed the inflow of $28 billion from high-net-worth clients during the quarter, $7 billion arriving in the ten days following the announcement of the Credit Suisse takeover in March. 

Here are other highlights of the first quarter:

• Revenues reached $8.75bln vs. 9.38bln a year ago
• Operating expenses were $7.2bln from $6.6bln a year ago
• CET 1 capital ratio, a measure of bank solvency, came in at 13.9% vs. 14.1% a year ago

Retaining clients and assets is a major challenge for Sergio Ermotti, who returned as UBS CEO to oversee the historic merger. The results didn’t include Credit Suisse’s operations since the merger has yet to be finalized.

Credit Suisse revealed on Monday that it borrowed far more from the Federal Reserve’s liquidity backstop program than previously known, with clients continuing to withdraw after the deal was announced. 

In an interview with Bloomberg TV, Ermotti said the inflows at UBS are “a sign of confidence of our clients.” He noted that the inflows weren’t just from Credit Suisse clients but also from the US. 

During the banking crisis last month, UBS froze its buyback program. Ermotti said during the interview: 

“We are reiterating our intention to have a progressive cash dividend increase every year and we definitely have an intention to resume share buybacks when its appropriate.” 

UBS shares fell as much as 5% Tuesday morning. 

Here is what analysts are saying (courtesy of Bloomberg): 

JPMorgan (Kian Abouhossein, overweight) says while earnings can be seen as weak, long-term view unchanged 

• Says consensus EPS could be cut 3%-5% after bank gave worse than expected NII guidance for wealth management 
• Notes more details on Credit Suisse merger were expected

KBW (Thomas Hallett, underperform) says results were a “lackluster set,” with wealth management underwhelming and also sees material downgrades to 2023 expectations following NII guidance 

• Sees consensus going down 5% as bank guided that wealth management, personal and corporate net interest income to be broadly in-line with 2022 4Q annualized 
• Capital below consensus 
• Says results disappoint, remains underperform

Citi (Andrew Coombs, buy) sees earnings as uneventful, notes there could be disappointment on litigation charge, cautious outlook commentary 

RBC (Anke Reingen, sector perform) notes 1Q missed estimates on higher litigation provisions and also sees consensus estimates earnings cuts on the NII guidance

Moving forward, UBS must integrate Credit Suisse, and any overlapping business units will likely result in thousands of job cuts.