When Sergio Ermotti exited UBS’s newly refurbished headquarters on Zurich’s Bahnhofstrasse for the last time on November 1, he left his employer in fine shape. The Swiss lender has had a startlingly good year.
UBS’s profit rose 99.5% year on year to $2.1 billion in the three months to the end of September 2020 – the best third-quarter performance in a decade. Through the first nine months, profits rose 37.4% on an annualized basis to $4.92 billion.
There were relatively favourable conditions for UBS. Although Switzerland’s economy probably shrank by around 5% in 2020, the rest of Western Europe fared far worse.
But UBS profited this year in part because what it does well – notably wealth management – is well suited to these kinds of big systemic shocks.
Its global wealth management division posted a pre-tax profit of $1.06 billion in the third quarter, up 18% year on year. That’s the best third-quarter data since 2011, driven by record figures from Asia and the Americas.
Why? In its third-quarter performance overview, UBS pointed to “high levels of client activity and greater market volatility.”
Perfect storm
For UBS at least, the year embodied the right kind of perfect storm.
In our review of UBS in 2019, we wrote: “Low volatility hits wealth managers, and UBS is the biggest wealth manager of them all. Lack of client activity hurts revenues.”
Well, in 2020, the opposite happened. The wild swings in stock prices this year, wedded to a clamour for yield, forced UBS’s super-wealthy clients – its bread-and-butter – to flock to it in search of returns and investment ideas. UBS didn’t disappoint.
In his last-ever quarterly announcement, published in October, Ermotti said the results: “Demonstrate that our strategy is differentiating us as we continuously adapt and accelerate the pace of change.”
Ermotti leaves UBS as the best-performing big bank stock in Europe in 2020. Revenues from its global markets division rose 26% year on year, excluding a one-off sale of intellectual property rights in the third quarter.
The pandemic and political uncertainties may lead to periods of higher market volatility
UBS
Its common equity tier-1 ratio was 13.5% at the end of September, against 13.1% a year earlier. Its return on tangible equity was 16.2% at the end of the third quarter, versus 8.7% a year earlier.
So, what’s next?
Ermotti’s replacement Ralph Hamers has big shoes to fill. The 54-year-old Dutchman ran ING for seven years until July.
He arrives with a reputation as a good communicator and for adopting a digital-first approach that he earned while in charge of the Amsterdam-based lender. But the new man at the helm faces a host of questions in 2021.
With Europe’s banking sector facing a wave of big-ticket M&A deals, will UBS choose to swim with or against the tide? Would a merger with Credit Suisse or Deutsche Bank make sense?
Wealth management was a big winner in 2020, but we enter a year full of new risks and uncertainties.
“Going forward, the pandemic and political uncertainties may lead to periods of higher market volatility and could affect client activity positive or negatively,” UBS said in its third-quarter results.
A year of higher volatility is likely to help the Swiss institution, lower volatility less so.
Greater challenge
A far greater challenge for all heavyweight wealth managers is the need to tap into yield-bearing assets in a world weighed down by negative interest rates.
Can Hamers bring his digital acumen to bear at a bank that makes a lot of its money by serving financially sophisticated wealthy clients who crave the personal touch?
Finally, can we expect a year peppered with new partnerships? UBS makes much of its desire to team up with big domestic banks to tap into localized revenue streams.
In 2019, it joined forces with Japan’s Sumitomo Mitsui of Japan and Banco do Brasil. Its joint venture with the Brazilian lender, called UBS BB, is now up and running. But will it catch fire?
Asia will take up a lot of Hamers’ time in 2021 – but what of Australia, where the investment bank community is experiencing some dramatic change. UBS has lost a lot of its top talent to new or expanded investment houses such as Jarden Australia and Barrenjoey Capital Partners.
Back home, the bank announced a new tie-up in October with Switzerland’s Partners Group, with the aim of plugging its super-wealthy clients directly into yield-generating private equity deals.
