A Smart Bank Strategy That May Have Peaked

UBS and rivals like Morgan Stanley have become asset gatherers, which was great while markets rose and rose  

By Paul J. Davies




One of the better bank strategies of recent years has been to focus less on deals and more on fees. That approach now faces a severe test.

UBS ’s fourth-quarter results, published Tuesday, were generally disappointing, but of particular concern for investors should be the trends seen in asset and wealth management, visible also in results from Morgan Stanley and BlackRock.
All three have endured some combination of asset outflows, lower financial-market valuations and a drop-off in trading by institutions and wealthy individuals. These problems have been driven by widespread worries about the economic cycle and more combative politics within and between countries, none of which are disappearing in the near term.

UBS’s group profits and revenue were worse than expected in the final quarter of 2018. Even in a tough quarter generally for investment banking, the Swiss bank’s equities trading, advisory work and underwriting looked poor compared with U.S. peers. The loss in September of its chief investment banker, Andrea Orcel, may have had an influence, though it is too soon to be sure.



But more disappointing for UBS investors will be the $8 billion in net outflows from wealth management in the final quarter, of which $4.7 billion was from the global superrich, who are banks’ most profitable customers.

Not only is money leaving the business, but investors did less with what remains: UBS’s transaction-based revenue in the business fell to its lowest quarterly level in a decade. Sergio Ermotti, UBS chief executive, said U.S. investors have almost a quarter of their assets in cash, a record high. In Asia, UBS avoided outflows, but clients cut their borrowing and slashed transactions too.
UBS has been focusing on growing repeat revenue from management fees or interest income in wealth management.

 UBS has been focusing on growing repeat revenue from management fees or interest income in wealth management.
UBS has been focusing on growing repeat revenue from management fees or interest income in wealth management. Photo: arnd wiegmann/Reuters


Overall, global wealth management revenue was down 2% in the final quarter versus the same period last year, a slightly better outcome than Morgan Stanley’s 6% year-over-year decline.

Both these banks and Credit Suissehave been reorienting their businesses away from volatile transaction-based revenue in both investment banking and wealth management and focusing instead on growing repeat revenue from management fees or interest income in wealth management.

This has been a great strategy while markets kept rising. But if they continue to stutter over coming quarters, then a shrinking asset base will hurt recurring revenues and earnings prospects for these banks as well as for managers like BlackRock. Asset gathering hasn’t had its day, but it may have had its best years for some time.

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