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UBS says Q1 'one of the worst' in recent history

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UBS Chief Executive Officer Sergio Ermotti gave the most decisive verdict yet on the difficult markets faced by Europe’s investment banks, describing conditions as the toughest in years.

UBS will slow down hiring and deepen cost cuts by about $300 million as it confronts one of the worst first-quarter environments in recent history, Ermotti told investors at a conference in London on Wednesday. The downbeat outlook sent UBS shares down as much as 2.6% and prompted declines at investment banking rivals Credit Suisse and Deutsche Bank.

Swizerland’s largest bank adds to the evidence that conditions haven’t improved from the fourth quarter when French lender Societe Generale issued a profit warning for its markets business. Executives at both Citigroup and JPMorgan in recent weeks have warned of weaker trading revenues compared with a year ago. January was a terrible month for the trading business at Deutsche Bank, people familiar with the matter have said.

Ermotti’s comments suggest the quarter is even worse than the bank suggested last week, when it said clients have remained cautious in the first months of this year. UBS cut thousands of investing banking jobs over the last decade as it tilted toward private banking. That strategy has become a blueprint for rivals including Credit Suisse, but it also leaves the bank open to revenue dips after market corrections or when clients stay on the sidelines.

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Volatility and volumes are weak compared with the euphoric start to last year, and investors have not yet regained confidence. Ermotti said there has been very little merger or initial public offering business outside of the U.S., with investment banking revenues down about one third compared with a year ago.

It’s a sharp contrast with the beginning of 2018, when market volatility surged to a near five-year high, leading UBS and other banks to profit from a boom in trading. Now, cautious clients and muted markets are making Ermotti’s job more difficult.

UBS in October presented a slate of ambitious new targets to investors that depended in part on factors outside of the bank’s control, such as the performance of global equities and other assets. With a darker outlook setting in, the bank is turning to cuts to make up for lost assets and revenues.

Global wealth management revenue is down about 9% from a year ago, Ermotti said, with the gap narrowing as the quarter proceeded. Net new money should be positive, and the bank aims to offset the drop in revenue with a 5% reduction in costs, he said.

The investment bank is also dealing with the loss of Andrea Orcel, a star banker who had turned the trimmed-down investment bank into a bright point of quarterly earnings. The unit posted a $47 million loss in the last months of 2018.

Orcel left the bank in September, when he accepted an offer to become chief executive officer of Banco Santander. That offer was later rescinded in a dispute over pay.

Ermotti is struggling to persuade investors that he can build out UBS’s leadership in European banking. The stock lost 32% of its value last year despite positive financial results, leading the board of directors to express its disappointment in the share price in the bank’s annual report last week.

Bloomberg News