UBS’s stellar financial performance in the third quarter reinforces its position as the best-performing big bank stock in Europe. This was revealed in the last results announcement by CEO Sergio Ermotti.
With M&A gaining traction across the continent, the boost to UBS’s share price of these unexpectedly good Q3 numbers means the bank is even better-placed to lead this trend, as Ermotti’s successor, ex-ING CEO Ralph Hamers, takes over as chief executive on November 1.
While the Swiss firm is trading at a discount to its equity book value of about 25%, that compares with an average of almost 40% across western Europe and more than 50% in the eurozone, according to research from Citi.
The share-price differential is due to the picture on profit, and therefore dividends, compared with the rest of Europe.
A good financial performance this year at UBS makes it more difficult for the Swiss financial regulator Finma to justify continued restrictions on pay-outs, especially if Credit Suisse and other Swiss banks do well, too.
Hamers was a fantastic communicator and salesman at ING, but he will need to start with a less bombastic tone at UBS
Despite the biggest economic and healthcare crisis for half a century – and when many European peers are posting deep losses – UBS’s profit is up by more than a third in 2020 so far.
It helps that Switzerland, before the autumn, had been able to manage the hit from Covid-19 so much better than almost all other European states. The Swiss economy will still shrink by nearly 5% in 2020, but most banks in Europe are dealing with recessions twice as bad. They have a much greater need to shore up capital and to delay their return to dividends payments.
Above all, the extraordinary crash and recovery in stock markets this year has been a big boost for the Swiss banks, especially UBS, as it is this kind of volatility that sees investors scramble to readjust their portfolios.
This has knock-on benefits for banks’ trading arms and wealth management businesses. Income at UBS’s wealth management business is up about 20% year to date. Its global markets revenue has risen even more. This more than offsets a dip in corporate and personal banking due to credit losses.
With no end to monetary-policy easing in sight, this year’s volatility may not be seen again any time soon.
However, UBS’s results, and its avoidance of the kind of equities mishaps that the French investment banks have suffered, means it is much harder for Hamers to suggest the bank is broken and needs fixing.
Justifying risky cuts, let alone M&A deals, will also be harder to do.
Elsewhere in Europe, banks are embarking on M&A as a way to solve challenges – even though asset-quality downsides are bigger than before.
Some of the big-bank mergers involving UBS that have been rumoured in recent weeks would be immensely complicated and dangerous. A merger with Credit Suisse might be safer for UBS than one with Deutsche Bank, but not for the Swiss state. It is, in any case, hardly something which a new CEO would comfortably undertake.
In the longer term, Hamers will need to find ways to mitigate the severely adverse impact of negative rates on UBS businesses in wealth management and Swiss retail, as the prospect of higher rates becomes ever more remote.
However, shock-and-awe tactics of the sort Jean Pierre Mustier employed when he arrived at UniCredit in 2016 would be far from appropriate here.
UBS’s success under Ermotti makes him a hard act to follow. Hamers cannot paint himself as a saviour in the way that Tidjane Thiam could when he became CEO of Credit Suisse.
Hamers was a fantastic communicator and salesman at ING, but he will need to start with a quieter and less bombastic tone at UBS. He doesn’t need to demonstrate his newness: he has never worked at UBS or even in Switzerland.
Even if he employs a more gradual and humble style at first, his background will speak for itself.
