UBS sees outflows as it beats profit expectations

UBS finished a tough 2016 on an upbeat note, with an unexpectedly strong increase in fourth-quarter profits, and has predicted improved US investor confidence would this year boost its wealth management businesses.

However, Sergio Ermotti, chief executive, warned the more positive US trends were not mirrored globally, and UBS’s shares fell 1.2 per cent in early trading as analysts raised concerns about unexpected fourth-quarter outflows of clients’ money from the bank’s wealth management arm.

Adjusted pre-tax profits at the Swiss bank rose 47 per cent to SFr1.1bn in the last three months of 2016 compared with a year earlier, helped especially by a significant pick-up in US wealth management and in UBS’s investment bank.

Analysts had expected adjusted pre-tax fourth-quarter profits of SFr638m.

Since 2012, UBS has focused on managing the wealth of the world’s richest individuals and families and used its investment banking arm to support that goal. The strategy enabled it to outperform European rivals during last year’s global market turbulence — but could mean it benefits less from recent market improvements sparked by Donald Trump’s election as US president.

“There is a big difference between US client confidence and the rest of the world,” Mr Ermotti said. Overall, UBS had last year seen “persistent client risk aversion and substantial cross border outflows.”

Kirt Gardner, chief financial officer, said that Asian investors had fretted about China’s economy and relations with the US, while confidence in Europe had been hit by the rise of populist political parties and the UK vote to leave the EU.

UBS’s main wealth management saw cross-border outflows of SFr7.4bn in the fourth quarter, mainly from emerging markets and the Asia-Pacific region.

Chirantan Barua, analyst at Bernstein, said the outflows from the bank’s vast wealth management arm “confirms the hypothesis that new money is moving more into passive platforms than to active ones”.

The bank also warned that voluntary schemes allowing customers to “regularise” their financial affairs with tax authorities, and automatic information agreements signed by Switzerland would curb new money inflows this year.

UBS’s investment bank did better than expected with a one-third rise in quarterly advisory income.

UBS said part of the improvement in its US wealth management business was because of lower provisions for litigation and regulatory matters.

Full-year adjusted profits, at SFr5.4bn, also exceeded analysts’ expectations but were lower than the SFr5.6bn reported in 2015.

Departing slightly from its usual caution, UBS said that “although macroeconomic uncertainty, geopolitical tensions and divisive politics continue to affect client sentiment and transaction volumes, we have begun to observe improved investor confidence, primarily in the US, which may benefit our wealth management businesses.”

However, the Swiss bank warned lower-than-expected and negative interest rates, particularly in Switzerland, continued to “present headwinds”. New bank capital standards and regulatory changes would also increase capital costs.