© 2020 Arizent. All rights reserved.

UBS signals potential return to share buybacks

UBS branch July 2020 earnings
Register now

UBS Chief Executive Officer Sergio Ermotti is looking at more share buybacks as a way to reward investors while keeping flexibility during the economic uncertainty caused by the coronavirus pandemic.

The Swiss bank signaled the worst hit of the crisis on its balance sheet may already be over, raising the prospect that shareholder payouts will resume as early as next quarter after freezing returns under pressure from regulators. Ermotti said the bank is ready to reduce its dividend payout level, the highest on Wall Street, as it seeks greater control over what it pays and when.

“Share buybacks have been demonized way too much,” Ermotti said in a conference call on Tuesday. “Buybacks in an environment like this one are an excellent way for banks to retain flexibility in their capital return policies.”

UBS is firing one of the first salvos in the controversial debate in Europe surrounding bank dividends and share repurchases after lenders were given various regulatory breaks to help them weather the crisis. A few of the stronger banks in the region have started to lobby for a resumption of payouts again to help revive flagging share prices, though regulators have urged the industry to conserve capital.

UBS is better placed than some rivals because its focus on wealth management shields it from the worst of the expected wave of bankruptcies that prompted Wall Street firms to set aside tens of billions of dollars. The lender benefited in the second quarter from the trading bonanza that saw the top U.S. firms post record profits, though to a lesser degree after paring the investment bank.

The chief executive outlined a future where offices need not be fully staffed.
July 21

The issue of dividend payments and buybacks is also controversial in Europe because of the risks of a two-speed system developing where stronger European banks pushing to be allowed to resume payouts widen the gulf with weaker rivals. Finma, the Swiss watchdog, followed the ECB which urged banks to postpone dividends until at least October.

UBS — while warning of uncertainty ahead —attracted $9 billion of net new money at the private banking business in the second quarter and saw higher transaction-based income as clients boosted trading in volatile markets. While costs to cover bad loans will stay high in the second half, they’re set to decline from the $540 million the bank set aside in the first six months.

UBS and Credit Suisse were among the last European firms to delay their dividend. Ermotti said he’s now confident that the bank would pay the second tranche of its 2019 dividend in the second half and may revive a $450 million buyback program it halted in March, or start a new one.

“While it is too early to be definitive about capital returns for 2020, we are taking a fresh look at our mix between cash dividends and buybacks going forward, eyeing a dividend payout ratio more in line with our most relevant U.S. peers,” Ermotti said on the call. One U.S. bank, Wells Fargo, was forced to cut its dividend to 10 cents a share from 51 cents after it posted its first quarterly loss since 2008 and took $9.5 billion in provisions for credit losses.

Swiss rival Julius Baer on Monday also signaled its preparing to restart its dividend payments after reporting record first-half profit, though it still remains to be seen whether European regulators outside Switzerland will give the green light. BNP Paribas is leading a charge by French lenders lobbying to restart payments, people familiar with the matter said last month.

UBS shares rose as much as 4.5% in Zurich trading and were up 2.7% at 11.58 francs as of 2:55 p.m. The stock is down about 3.5% this year.

The Swiss bank added $272 million to its loan loss provisions during the quarter, slightly below estimates, with Europe starting to reopen businesses. By comparison, five of the biggest U.S. banks put away $35 billion combined during the three months, trying to predict how bad things could get with the pandemic still ravaging the world’s largest economy. UBS on Tuesday reiterated that the majority of its credit exposures are of high quality, in part reflecting the wealth of its home country.

UBS joins lenders including European rival Deutsche Bank in predicting that provisions to cover souring credit are peaking. It’s also predicted along with Wall Street firms that the volatile market conditions that boosted trading revenue in the first half probably won’t endure.

The wealth unit, UBS’s largest contributor of revenue, showed resilience during the worst of the pandemic, with net new money positive across the regions. UBS has been passing on the cost of Europe’s negative interest rates to more clients, charging them for deposits above a certain size that aren’t invested. Less positively, recurring net fee income declined 8% at the wealth management business, mostly reflecting lower invested assets at the beginning of the quarter.

Wealth management profit in Asia helped make up for a 37% drop in profit year-on-year for the business in the Americas. That region faced strong headwinds last quarter due to lower invested assets, which affect recurring fee income, and lower dollar interest rates.

Ermotti, who will step down at the end of October, has scaled down trading after the financial crisis, though the bank still has a sizable equities business.

While many lenders, particularly in Europe, have reduced their trading operation after the financial crisis, the pandemic has shown the benefits of maintaining such a business, which can provide a hedge during times of crises and make money while other parts of the bank suffer from loan defaults.

Other key highlights from UBS’s second-quarter results:

  • Net income $1.2 billion vs estimates of $963.1 million
  • Global wealth management pre-tax profit of $880 million vs estimates of $736 million
  • Net interest income at wealth management up 6%
  • Higher market levels will benefit recurring fee income
Bloomberg News