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UBS wealth management Q3 earnings seen down, high hopes for new co-chief Khan

Earnings at the core wealth management division of UBS Group AG could continue to slide in the third quarter as the market environment remains challenging, according to analysts.

Low rates and choppy equity markets are driving down group earnings, with consolidated net profit attributable to shareholders expected to drop by 22.5% year over year, according to a consensus forecast of 22 equity analysts polled by the bank. UBS will post its third-quarter earnings Oct. 22.

Underwhelming year

So far in 2019, UBS has "underwhelmed the market as its global wealth management unit has disappointed expectations," Berenberg analysts said in a note Oct. 21. The Swiss group has gradually focused on wealth management in recent years while downsizing its investment banking unit.

The Swiss group's wealth management arm is expected to post an 11.1% drop in third-quarter adjusted pretax profit to $857 million from $964 million a year ago, according to the analyst consensus. Adjusted total operating income in wealth management is seen falling 2% year over year to $4.00 billion, compared to $4.08 billion in the third quarter of 2018.

Given the uncertainty in global markets, client sentiment has been subdued "leading to inertia in trading in recent quarters," UBS CEO Sergio Ermotti said at a presentation Sept. 24. Apart from several extreme spikes, volatility has been low most of the time, he told analysts. With no volatility in the markets, institutional investors, wealth management, and private clients will trade less, Ermotti said.

Low rates

CFRA Research, which has a "Hold" recommendation on UBS stock, said prolonged market uncertainty over global growth and geopolitical outlook are the key downside risks for UBS. Expected interest rate cuts by global central banks will also weigh on the group's net interest income, CFRA equity analyst Firdaus Ibrahim said.

UBS' global wealth management business and its private and commercial banking make the group particularly sensitive to the interest rate environment, which has worsened since the second quarter of 2019, Andrew Lim, an equity analyst at Societe Generale said in a note in early September.

SocGen has a "Sell" recommendation on UBS stock and expects the group to experience net interest margin compression "well into 2020." Given how choppy equity markets have been, wealth management trading volumes are not likely to recover and offset the NIM compression, Lim said.

The projected operating income decline will be mainly driven by net interest income, which is expected to sink 6.5% year over year to $945 million, according to the analyst consensus.

"We recognize the headwinds from the low and negative rates and we are optimizing our business for the evolving environment," Ermotti said.

Khan to the rescue

Berenberg, on the other hand, is more optimistic on UBS, maintaining a "Buy" recommendation on the stock. Despite having disappointed thus far, wealth management is a "structural growth area," the analysts said. There are high hopes for the unit's new co-head Iqbal Khan, who joined UBS from rival Credit Suisse Group AG Oct. 1.

Under Khan, the international wealth management division of Credit Suisse more than doubled its pretax income to CHF1.7 billion in 2018 from CHF700 million in 2015, Berenberg said. This was accompanied by a 29% surge in the unit's loan book over the period, they said. At the same time, UBS only grew its loan book by 11%, they said.

Khan might usher in a new era of "a more growth-focused approach" at UBS' global wealth management unit, according to the analysts. Khan, who quickly rose in the ranks at Credit Suisse, is considered a strong candidate to replace UBS' CEO Ermotti, who has been at the helm since 2011.

In a recent interview, Ermotti said the group had at least three internal candidates who could succeed him.