Sergio Ermotti, chief executive of UBS, has struck a downbeat note about the chances for a rebound in performance during an interview with Euromoney, after what amounts to a profit warning for the first quarter.
UBS took the unusual step of publishing Ermotti’s comments at last week’s Morgan Stanley European financials conference in London, which is closed to the press. He estimated that first-quarter investment banking revenues would be down by a third.
Ermotti’s assertion that the environment in the first quarter, especially outside the US, was “one of the worst” in recent history helped push its share price down 5% last week, underlining sinking sentiment across the banking sector in Europe.
Speaking to Ermotti in advance of Euromoney’s official 50th anniversary edition, we asked how confident he could be that first-quarter conditions were a one-off. Ermotti warned that there was little that banks can do to boost profits in the short term, while lower economic growth is weighing on net interest margins, as well as fees, as firms’ appetite for investment and demand for growth capital slumps.
“The economy has to grow, and in a predictable way,” he said. “If we don’t have a more balanced and predictable macro-economic and geopolitical picture, it’s quite difficult to restore confidence.”
Risk aversion is growing; it’s affecting everyone, and other areas of banking business are not compensating- Sergio Ermotti
After the bank also flagged an expected 9% drop in first-quarter revenues in global wealth management, Ermotti told Euromoney that delayed increases to interest rates in Europe are hurting the deposit business on which banks such as UBS would traditionally fall back during periods of market volatility and uncertainty.
“You had a natural hedge in deposits,” he said. “Now it’s crystal clear that if you try to grow deposits, especially outside of dollars, there’s a capital hit and profit leakage, due to the low-interest-rate environment.
“Risk aversion is growing; it’s affecting everyone, and other areas of banking business are not compensating.”
Ermotti told the conference that UBS would consequently be “redoubling its efforts” to cut costs and slowing down hiring and some IT projects. The anticipated $300 million benefit should accrue in the second half of the year.
The steep fall in UBS’s first quarter results is partially due to unusually favourable conditions in the markets a year earlier.
“Last year the industry had a spectacular first quarter,” Ermotti said. “We had a blow-out first quarter in the investment bank, with several big transactions, so the first quarter of this year would have looked relatively better if we had not had such a good first quarter in 2018.”
However, fundamentally, he does not see costs as the answer to a weaker economy, or to structural overcapacity in European banking.
“In today’s environment, it’s impossible to take out costs as quickly as the revenue deteriorates,” he continued. “There’s an obsession on short-term cost savings in the industry today. Besides that, you don’t resolve strategic issues only by taking out costs.”
He was more optimistic about the prospects for bank mergers, although he said these should have a European rather than national character.
“Unless there is greater clarity on the economic environment, some banks will need to take a tough decision about what they want to be,” said Ermotti. “In the meantime, there is more of a sense at the regulatory level that many banks are not too big to fail, but too small to survive.”