UBS and the global wealth shock

UBS shares plunged eight per cent after its fourth-quarter results demonstrated the volatile, high-risk nature of wealth management, commonly viewed as a low-risk, lucrative, recurrent fee revenue niche of global banking. When stock markets crash, as they did last August and in January 2015, wealth management fees plunge, clients grow risk averse, hoard cash and private bank assets under management shrink. UBS demonstrated that not even the world's largest wealth manager is immune from the carnage in global risk assets.
UBS chairman Axel Webber often says "wealth management is not just what we do, it is who we are". Bad strategic bet in 2016, Herr Webber. UBS fourth-quarter wealth management revenues were down an incredible 47 per cent. Gross margin has now fallen to 81 basis points. UBS client outflows were 3.4 billion Swiss francs, even in emerging markets ("growth markets" in the propaganda doublespeak of Third World money managers!) where its rival Bank Julius Baer gained client inflows. None of the above is an auspicious omen for the UBS global wealth management brand.
Even though UBS scaled back its global investment banking footprint in 2012, its revenues declined in equity/debt capital markets, credit underwriting and global commodities. UBS shares have fallen 25 per cent from its recent peak but I believe it is premature to bottom fish in the Swiss megabanks until markets stabilise and the SNB clarifies its rules on systemic risk capital surcharges. UBS results suggest the bank earned barely four per cent returns on equity, far below its weighted average cost of capital. UBS's premium valuation on Wall Street, based on the perceived stability of its private banking and wealth management franchise, is now at grave risk.
UBS also disclosed a six billion Swiss franc exposure to oil and gas borrowers worldwide. After all, distressed commodity trader Glencore (formerly Marc Rich's Zug based oil and metals empire) and Transocean, an oil driller devastated by the Deepwater Horizon offshore rig explosion in the Gulf of Mexico, are based in Switzerland. It is also significant that 90 per cent of UBS' oil and gas loan exposure is to borrowers in North America. I expect at least a thousand highly-leveraged shale oil drillers and explorers in West Texas, North Dakota and Alberta to go bankrupt by late-2016. This will likely mean a spike in UBS non-performing loans.
My friends ask me if UBS could be forced into a Standard Chartered style dilutive capital raise. (Note StanChart shares have fallen to barely 400 pence, way below my 1,500 pence recommended short!). No. UBS has a 14.5 per cent Basel Tier One capital adequacy ratio. UBS New York will also faces losses on junk bond (high-yield) underwriting and loans.
UBS has greatly derisked its balance sheet since the $50 billion in losses under ex-chairman Marcel Ospel almost led to the failure of the bank in 2008. The spike in the Swiss franc after the Swiss central bank abandoned its 1.20 euro ceiling peg has also led to an unsustainable increase in costs in its Alpine boogie wonderland home market. UBS also faces cutthroat competition from US, British and local rivals in private banking markets like the GCC, where the plunge in oil prices has led to a shrinkage in wealth creation and a glut of private bankers. For now, I expect UBS shares to fall to 13 Swiss francs.
UBS Group made a strategic bet to increase its presence in Hong Kong, Singapore and Asian wealth markets. However, China's financial chaos has hit Asia hard. Russia, the Middle East, West Africa and Latin American wealth markets are devastated by the plunge in oil/metal prices and the free fall in local currencies. Negative interest rates in Switzerland, Benelux, Denmark, Sweden and now Japan and poor investment performance in its proprietary funds will continue to pressure UBS wealth earnings. UBS investors learnt the hard way that there is nothing stable or profitable about wealth management in a bear market. In a global recession, the wealth management and bank leverage business is leprosy.
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae