UBS profit surges above forecasts, hazy capital outlook weighs on shares

By Dave Graham

ZURICH (Reuters) – UBS Group on Wednesday posted third-quarter profit well above forecasts, driven by higher revenue and cost reductions, and completed a first wave of client migrations from Credit Suisse since acquiring its former rival last year.

Net profit attributable to shareholders at Switzerland’s largest bank was $1.4 billion, nearly double the $740 million estimated by analysts in a company-provided poll. Total revenue came in at $12.3 billion, beating the $11.5 billion consensus.

But the bank’s shares closed down 4.5%, giving up early gains of nearly 4%, after taking a hit due to uncertainty about regulatory changes, the broader outlook, and how much spare capital the bank would have going into next year.

UBS CEO Sergio Ermotti hailed the bank’s revenue growth and highlighted what he called strong client momentum, particularly in the Americas and in Asia Pacific.

“But there is no room for complacency. We are just about halfway to restoring pre-acquisition levels of profits and returns on capital,” he told an analyst call.

Markets are waiting to see how tough Swiss authorities will be with new regulations for the bank, particularly on capital.

The government wants UBS and other systemically important banks to hold more capital to prevent the risk of another Credit Suisse-style collapse. It wants to factor into its proposals the findings of a parliamentary report into the demise of Credit Suisse due to be published before the end of 2024.

Ermotti said in August he expected the regulatory outlook to become clearer around the turn of the year. But on Wednesday he said it was very unlikely he would have much more clarity by February and that UBS was “not really in control of the timing”.

Andreas Venditti, an analyst at Vontobel, said those remarks had probably helped push UBS shares into the red.

“The market does not like that the regulatory uncertainty might last longer than some might have hoped,” he said.

UBS was in technical discussions with the government but was yet to reach a phase “where you get any feedback”, Ermotti said.

COST REDUCTIONS

UBS’s investment bank delivered an operating profit twice as high as the consensus forecast provided by the bank, while losses at the non-core and legacy unit, which handles unwanted Credit Suisse assets, were below expectations.

UBS said it was progressing well with cost reduction plans and now expects to achieve a figure of around $7.5 billion this year. Previously it had forecast around $7 billion.

UBS has begun moving clients from Credit Suisse on to its own platforms, and the bank completed the first phase of client account migrations in Luxembourg and Hong Kong during October.

Singapore and Japan were expected by year-end and Switzerland will follow next year, the bank said. Ermotti said he expects the process to last about 18 months.

On the fourth quarter, UBS said “ongoing geopolitical conflicts and the upcoming U.S. elections are creating uncertainties that are likely to affect investor behaviour.”

In May, UBS formally completed the merger with Credit Suisse. Ermotti said last month that UBS’s integration of its former competitor was running ahead of schedule.

Due to that progress, UBS accelerated amortization of a capital adjustment linked to the Credit Suisse acquisition that impacts common equity tier 1 capital (CET1) ratios. That meant UBS’s CET1 capital ratio – a measure of financial strength – now stood at 14.3%, down from 14.9% in the previous quarter.

Citi analyst Andrew Coombs said that change and new Basel capital rules coming into force in January meant that UBS now had very little excess capital today relative to its around 14% target, “so any (share) buyback next year will now have to come out of organic capital generation, which limits the scope.”

On top of that, Coombs said, was the ongoing uncertainty surrounding the rules on capital requirements.

UBS said it remains committed to its dividend and buyback ambitions for 2025 and 2026.