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UBS shares plummet as bank cuts midterm targets

UBS Group AG had to adjust its targets for the next three years to account for an abrupt change in the macroeconomic and interest rate environment since the Swiss bank's last outlook update in late 2018, CEO Sergio Ermotti said Jan. 21.

UBS cut its medium-term guidance for its cost-to-income ratio and return on common equity Tier 1 capital in its earnings report for 2019. The group posted a decline in its net profit attributable to shareholders to $4.30 billion in 2019 from $4.52 billion a year ago.

Shares in UBS dropped around 5% upon the earnings release during the morning session. At 2:01 p.m. Zurich time, the stock was trading at CHF12.14, down 5.23% on the prior-day close.

Changed outlook

"Overall we had a solid performance in mixed market conditions [in 2019] and continue to see room for further growth," Ermotti said during an earnings presentation.

Nevertheless, he said, the change in outlook was necessary given that UBS now has completely different expectations about the global economic environment and the outlook for rates.

It now expects a return on CET1 capital in the 12%-15% range in 2020 to 2022, compared to its previous target of around 17% in 2019 to 2021.

The target range takes into account a variety of assumptions about future market conditions, Ermotti said. Therefore, 12% should not be seen as a target for any of the years but as a bottom level for the ratio in a stressed market scenario, he said.

"While in a more normalized environment over the next three years, our goal is to get closer to the 15%," Ermotti said.

UBS booked return on CET1 capital of 12.4% as of 2019-end, down from 13.1% a year ago.

The bank also changed its cost-to-income ratio guidance to a range of 75% to 78% for the next three years, compared to the previous goal of 72% for 2019-2021. The group posted an adjusted ratio of 78.9% for 2019, compared to 79.5% a year ago.

Performance metrics are still a long way off the group's longer-term ambitions and the more cautious outlook indicates pressure on the bank's capital generation capacity, which is a credit negative, ING credit analyst Suvi Platerink Kosonen said in a note Jan. 21.

Solid capital position

According to Ermotti, UBS has a strong capital position going into 2020 and capital return will remain attractive going forward. The CEO said he expects this to strengthen further in the second half of 2020.

UBS kept its CET1 ratio and CET1 leverage ratio guidance unchanged at about 13% and about 3.7%, respectively, for the period 2020 to 2022. The group's CET1 ratio stood at 13.7% as of Dec. 31, 2019, up from 13.1% as of Sept. 30, 2019, and 12.9% a year before.

Since 2011, UBS has generated $28 billion of CET1 capital, more than two-thirds of which was returned to shareholders, the bank said in its presentation.

The total payout ratio, measured as dividend accruals and share buybacks divided by net profit, will stand at 80% for 2019. The bank's board declared a dividend of 73 cents per share for 2019 when UBS also bought back $800 million worth of shares.

The group plans to buy back shares amounting to $450 million in the first half of 2020.

French case

A potential risk to capital generation is a pending appeal against €4.5 billion in fines and damages imposed on UBS by a French court, which found the group guilty of unlawful solicitation and laundering of the proceeds of tax fraud in February 2019. The group has appealed the ruling and rejected any wrongdoing.

"The appeal process is pending and a de novo trial has now been scheduled for June 2 to June 29, 2020," the bank said in a statement to shareholders.

UBS has set aside $516 million to resolve the French case. The bank will reevaluate its capital position in the second half of 2020, Ermotti said.