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UBS profit rose with virus chaos that forced dividend delay

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UBS recorded its strongest quarter in two years as the coronavirus pandemic shocked the global economy, giving a first glimpse into European banks’ performance during the early days of the crisis.

As markets tumbled and much of the world headed into lockdown, profit at the world’s largest asset manager rose by roughly a third to about $1.5 billion, well ahead of analysts’ estimates and the highest since the second quarter of 2018. Business was strong across the board, and capital and leverage ratios are in line with targets even after accounting for an increase in credit risk, the bank said.

At the same time, UBS and its crosstown rival, Credit Suisse, said they’d withhold part of their 2019 dividends until the second half, acknowledging that the real test for the financial system won’t come until later. The firms, acting at the request of their supervisor Finma, are among the last European lenders to delay payouts following regulatory relief.

“Our financial strength well above regulatory requirements and prudent risk management allow us to deliver on our current capital returns policy,” Chairman Axel Weber said in a statement. “Nevertheless, at Finma’s request, we have adjusted the 2019 dividend payout proposal given the high and unprecedented uncertainty.”

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Banks are a key focus as governments seek to ensure they keep lending to businesses that were effectively shut down to contain the spread of the virus. Finma has been increasing pressure on lenders to withhold dividends and shore up lending capacity, saying any payments to shareholders will be deducted from capital relief they’ve recently been granted.

Shares of both lenders rose in early Zurich trading, with UBS gaining as much as 4.3% and Credit Suisse rising 5.3%, before paring gains along with broader markets.

Analysts polled by UBS in early February, before the pandemic really hit Europe, had expected a profit of $1.17 billion. While that figure may not be fully comparable with the actual results, given the extent of the market dislocations since then, the results give a first indication how lenders navigated the turmoil.

“We saw demand for loans and credit in the investment bank,” Chief Executive Officer Sergio Ermotti said in an interview on Bloomberg TV. In wealth management, “we saw some deleveraging coming through but also some new demand for credit, which has for sure contributed to an increase to our lending balance.”

Ermotti said while he welcomed the recent rebound in equity markets, it suggests there’s an expectation for an economic recovery in the second half of the year that may be too optimistic.

“I would say there is a downside risk to that scenario, and I would be careful about getting too much exposure in equities at this stage,” he said, pointing to credit as a better investment opportunity for now.

Ermotti, who last month had stopped short of scrapping the dividend, said he reversed course after Finma requested the bank review its position. UBS also said that if it ends up not paying out the second dividend installment, management bonuses would no longer be paid in cash but allocated to “deferred equity-based and contingent capital compensation plans.”

“As needed, we also commit to take further measures as the year unfolds in all 2020 compensation decisions and review our policies for both management and the board of directors,” UBS said.

Credit Suisse already last month froze its plan to buy back as much as 1.5 billion francs ($1.5 billion) of shares this year.

UBS said it has already provided 2.1 billion francs in liquidity to over 16,000 mostly small and medium-sized companies since the launch of the Swiss government-backed lending program last month. The bank has also pledged to donate $30 million toward virus aid projects.

--With assistance from Patrick Winters and Manus Cranny.

Bloomberg News