UBS AG, rebuilding after a government bailout and a U.S. tax investigation that forced it to hand over names of rich clients, probably attracted fresh funds to its private bank for a second straight quarter.
The reversal, after 27 months of outflows, is a sign that Chief Executive Officer Oswald Gruebel has patched up Switzerland's largest bank following its near collapse in 2008 and the U.S. probe. The Zurich-based company may report 2010 earnings of 7.2 billion francs ($7.5 billion) tomorrow, its first annual profit since 2006, according to 21 analysts surveyed by Bloomberg News.
The challenge now: Generate fatter profits from the $1.7 trillion UBS oversees for wealthy clients while elbowing aside Credit Suisse Group AG, which raked in more assets than any Swiss bank since the financial crisis began. As both face an erosion of profitability from an assault on banking secrecy, UBS has to fight that much harder to attract rich clients, who removed 251.6 billion francs in the nine quarters through June.
“UBS has been reinvesting in wealth management in terms of hiring people and restructuring business quite dramatically,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA who rates the bank “neutral.” “They're trying to bring confidence back and to get four quarters of net new money inflows this year. That's the big thing Gruebel wants to see.”
Slower Pace
The bank is still attracting funds at about a fifth of the pace of its biggest Swiss competitor, analysts estimate. UBS may have added a net 2.4 billion francs from investors at its wealth-management units in the fourth quarter, a survey of analysts by Bloomberg News showed, after inflows of 1.2 billion francs in the previous three months.
Credit Suisse, which oversees 935 billion francs in assets for the rich, attracted 137.5 billion francs of net new funds since the beginning of 2008 and probably brought in 11 billion francs in the final quarter of last year, according to analysts' estimates.
Officials at the two banks declined to comment before fourth-quarter earnings reports this week.
Wealth management and retail banking contributed 50 percent of pretax profit in the first nine months of the year at UBS and 44 percent at Credit Suisse, company reports show. The businesses will become even more important as stricter capital requirements in the wake of the financial crisis make investment banking more costly.
15 Percent ROE
A Swiss government-appointed committee in October proposed almost doubling the capital requirements for UBS and Credit Suisse compared with international Basel III rules that are scheduled to come fully into force in 2019. Profitability at banks' securities units, and fixed-income trading in particular, will be hit the most by the changes, Morgan Stanley analysts led by Huw van Steenis said in a Jan. 17 note.
Credit Suisse CEO Brady Dougan said in an interview in October that “it remains to be seen” whether higher capital requirements will prove a disadvantage for the Swiss banks. “We've got a business model that can actually cope with some higher level of capital requirement,” Dougan, 51, said.
Managing money for the rich may allow UBS and Credit Suisse to produce a 15 percent return on their shareholders' equity once tougher capital rules are in place, compared with between 11 percent and 13 percent for almost any other commercial or investment bank, estimated Dirk Hoffmann-Becking, a London-based analyst with Sanford C. Bernstein Ltd.
Jewel in Crown
UBS earned an ROE of 18 percent in the first nine months of 2010, as the pretax return on equity at the wealth management and Swiss bank unit was 48 percent, compared with 11 percent at the investment bank, company reports show. Credit Suisse's return on equity was 16 percent in the same period, with a pretax return of 48 percent at the private-banking division, and 21 percent at the investment bank.
“Wealth management is the jewel in the crown, that's what you own these banks for,” said Hoffmann-Becking. A sizable private-banking operation lifts return on equity, “which is one of the reasons why everyone is trying to get into it.”
UBS is the world's second-largest wealth manager after Charlotte, North Carolina-based Bank of America Corp. took the top spot by purchasing Merrill Lynch & Co. during the financial crisis. Credit Suisse ranks fifth after New York-based Morgan Stanley and Wells Fargo & Co. of San Francisco, according to a survey by London-based Scorpio Partnership, which provides research and analysis on the industry. Wealth managers typically cater to clients with at least $1 million to invest. (Click on the following link to view
the ten largest global wealth managers)
New Leadership
Gruebel, 67, who ran Zurich-based Credit Suisse until his retirement in 2007 and took over UBS two years ago, brought in executives from his former employer and other competitors to help turn around UBS. In April, he hired Lukas Gaehwiler, 45, from Credit Suisse as CEO for Switzerland and co-head of the wealth management and Swiss bank unit with Juerg Zeltner, 43.
In October, Jakob Stott, 55, previously with JPMorgan Chase & Co., joined to run wealth management for European clients who hold their assets where they reside. Christian Wiesendanger from Credit Suisse and Paul Raphael, who has worked for Salomon Brothers, Merrill Lynch and Credit Suisse, joined to head wealth management in Switzerland and the business in emerging markets, respectively, at the same time.
Swiss Profits
Robert J. McCann, 52, a Merrill Lynch veteran, joined UBS in October 2009 to help restore profitability at the wealth management Americas division, which includes the former Paine Webber brokerage that the Swiss bank acquired in 2000.
Zeltner's unit has “great potential” to become “even more profitable than it has been before,” Gruebel told investors and analysts at a November presentation in London. In the Americas, the bank needs to “sustain our recent track record of improving profitability,” he said.
Managing funds in Switzerland is most profitable for UBS and Credit Suisse, as they benefit from economies of scale and offer a broader array of products. In the first nine months of 2010, Credit Suisse made $1.35 in revenue for every $100 of assets managed in Switzerland, including money from clients who don't live there. That compares with 96 cents on funds outside Switzerland, excluding the U.S. UBS made $1.12 for every $100 of assets booked in Switzerland, compared with 89 cents on international assets and 80 cents in the Americas, according to company reports.
Out of Switzerland
The banks used to earn even more. Profitability is shrinking as some clients pull assets from Switzerland on tax concerns and as the banks invest to expand worldwide. UBS pocketed 33 percent of nine-month revenue in wealth management as profits, compared with 49 percent in 2007. At Credit Suisse, the ratio fell to 26 percent in 2010 from 38 percent in 2007.
“Profitability now is fairly poor by historical standards,” said Hoffmann-Becking. “If you can grow in Switzerland, everyone is happy. If you grow in Asia, the question really is will the operating margin hold?”
Since UBS said in May 2008 that it was under investigation in the U.S. on allegations of helping Americans evade taxes, the list of countries seeking repatriation of undeclared money from Switzerland has expanded from the European Union to India. Switzerland is negotiating dozens of tax treaties and is in talks with Germany and the U.K. on withholding taxes on money held in Swiss banks.
Funds at Risk
The U.S. Justice Department in October dismissed the case against UBS after the expiration of an 18-month deferred prosecution the bank signed to avoid criminal charges. The U.S. Internal Revenue Service dropped a demand for the identities of Americans who hold secret offshore accounts at UBS in November, after the bank turned over data on more than 4,000 clients.
UBS, which managed 108 billion francs in Switzerland for customers from the U.K., Germany, France, Italy and Austria as of September 2009, said last year these clients withdrew more than 20 billion francs in the 12 months through September. As much as 40 billion francs are still at risk from further tax regulations, the bank told investors in November.
Credit Suisse said it may lose between 25 billion francs and 35 billion francs to tax initiatives in other western European countries. Germany, Italy, the U.K. and France accounted for 106 billion francs in assets under management in Switzerland at the end of September, after 15 billion francs in net outflows from those clients since the start of 2009, the bank said in its third-quarter report.
More Trading
To counter narrowing profit margins and a slump in client trading, the banks are revamping their charges for wealthy clients. Credit Suisse increased fixed fees it charges private- banking clients in Switzerland for custody accounts and lowered transaction fees. UBS is putting a stop to discounts it was offering to halt outflows that plagued the bank since 2008.
A pickup in client trading would do the most to raise profitability at the private-banking units, said Kian Abouhossein, a London-based analyst with JPMorgan. He estimates the banks' wealthy customers are keeping about a third of their assets in cash, unwilling to trade while financial markets remain turbulent in the aftermath of the credit crunch and amid concerns over European sovereign debt.
“A reinvestment of the cash or at least half of the cash would have a materially positive impact on the banks' profits,” more than offsetting the effect of clients moving funds out of Switzerland, said Abouhossein.
—Bloomberg News—
