Not Deutsche

A luxury problem at Swiss bank UBS

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Going different directions. Source: DPA/Reuters

UBS has problems its German rival Deutsche Bank can right now only dream of. The Swiss lender reported a 19 percent jump in first-quarter net profit to 1.5 billion francs ($1.54 billion). That was more money than it earned all of last year. And yet, shares fell more than 4 percent because its flagship asset management business underperformed. The irony is that its earnings were saved by a division that UBS wants to be less reliant on — investment banking.

Deutsche Bank has tried and failed in recent years to achieve profit growth through its investment banking arm, which was beefed up through breakneck international expansion in the last quarter century but discredited by scandals during and after the financial crisis. Revenues have dried up, key staff has jumped ship and after three years of group losses, Germany’s biggest bank is under pressure to return to its roots, focusing on retail and corporate banking.

The shift in thinking was reflected this month by the removal of British CEO John Cryan and the appointment of German national Christian Sewing, who has a background in retail banking, to replace him. Though no major decisions have yet been made, some initial steps to scale back investment banking could be announced as early as Thursday, when Deutsche reports its own Q1 results, Handelsblatt has learned.

The results just didn’t fit the UBS narrative of a bright future in wealth management.

The fall in UBS shares must be all the more worrying for Deutsche Bank because UBS has already completed its restructuring and shift towards wealth management – a process that, in another twist of irony, was implemented by none other than John Cryan. As a result, UBS has been raking in cash for the past few years.

And yet, the reviews from analysts were damning. The latest earnings just didn’t fit the UBS narrative of a bright future in wealth management. “The results were disappointing across all divisions with the exception of investment banking,” wrote Kian Abouhossein, an analyst at JP Morgan Chase. Javier Lodeiro, an analyst at Zürcher Kantonalbank, wrote: “Investment banking saved the quarter.”

Still, UBS is now the world’s biggest wealth manager, where it’s been hard at work cutting costs and giving itself even greater punch by combining its global and US activities. The division, run by former Commerzbank boss Martin Blessing, now accounts for more than half of the group’s pre-tax profit and collected some 19 billion francs in net new funds in the first quarter. Its adjusted pre-tax profit rose to 1.1 billion francs, but analysts expected more. Profit fell in the Swiss home market due to one-time effects, negative interest rates and increased financing costs.

Investment banking meanwhile benefited from market volatility and saw pre-tax profit rise 13 percent to 629 million francs. Share trading volumes jumped, as did income from advising on capital market transactions such as IPOs. But that doesn’t mean UBS will rely on the division going forward. Its outlook for the second quarter is more muted. “We saw more transactions in the first half of the quarter than the second,” warned Chief Financial Officer Kirt Gardner.

The bank also pointed out that geopolitical tension and mounting protectionism posed a threat to investor confidence. That is something that could affect both divisions, as wealth management customers have also become more cautious. “They’re still positive but not as optimistic as before,” Mr. Gardner said.

Deutsche Bank is likely to be less picky about what division is generating profits. Shareholders are impatient to see progress – any progress – after the bank incurred another loss in 2017. Analysts expect a net profit of €662 million ($809 million) for the first quarter, a 15-percent rise over the same period last year.

Most big investment banks chalk up a third of their annual income from January to March. Disappointing results will likely strengthen Mr. Sewing’s resolve to make those “tough decisions” he pledged in an open letter to employees after his appointment this month — most probably meaning job cuts and other savings. Sources say cuts in its US investment banking operations are at the top of the list.

Michael Brächer is Handelsblatt’s correspondent for Switzerland and based in Zurich. Yasmin Osman, Michael Maisch and Daniel Schäfer in Frankfurt contributed to this story. David Crossland contributed and adapted this story for Handelsblatt Global. To contact the author: braecher@handelsblatt.com

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