By Jan-Henrik Förster, Jeffrey Vögeli and Giles Broom
(Bloomberg) --UBS Group AG suffered a net 15.2 billion francs ($15.2 billion) in withdrawals during the final three months of last year, in part because investors moved money out of Switzerland before the government shares their data with tax authorities, a trend that’s expected to continue this year.
The bank fell as much as 3.9 percent in Zurich trading, pulling other wealth managers lower, after saying all of its money management units saw net redemptions last quarter. UBS made just 73 cents in revenue on every $100 it oversees in wealth management, the lowest in the bank’s history, according to analysts at Citigroup Inc. led by Andrew Coombs.
“The wealth management trends are concerning,” the analysts wrote in a note to clients.
Chief Executive Officer Sergio Ermotti said in an interview with Bloomberg Television that clients were likely to continue repatriating money this year, before the trend should start to slow in 2018. Now in his sixth year as CEO, Ermotti has stepped up cost-cutting to help offset shrinking profit margins and is using technology to streamline wealth management, UBS’s main business since he scaled back the investment bank four years ago.
Pretax profit at the lender, Switzerland’s largest, more than tripled in the fourth quarter as rising interest rates and stocks boosted U.S. wealth management and the securities unit, and UBS put less money aside for litigation. The bank said it’s on track to meet a savings target of 2.1 billion francs by the end of this year.
Profit at the wealth management division, which caters to rich clients banking outside the U.S., rose to 368 million francs before taxes, from 344 million francs a year earlier. The unit, led by Juerg Zeltner, saw 4.1 billion francs in net redemptions during the quarter, mainly from Asia and emerging markets, where margins are highest.
‘Rolling Thunder’
“The tax amnesties are a process of rolling thunder for international wealth managers,” said Sebastian Dovey, managing partner at London-based consulting firm Scorpio Partnership. “UBS, as the largest wealth manager, is in the spotlight for these issues and has been progressively making remedy,” while many any other firms in offshore hubs still have a lot more work to do to resolve their problems, he said.
It’s about eight years since governments began cracking down on their citizens using Swiss banks accounts to hide their wealth from the taxman. Criminal probes by the U.S. and a series of tax and wealth repatriation programs by North American, European, and now Latin American countries, have spurred people to withdraw money from UBS and other private banks.
Switzerland’s entry on Jan. 1 into a club of countries which automatically collect information on non-resident bank account holders is the latest driver for customer withdrawals, Ermotti said. The system has put clients from various emerging market countries between a rock and a hard place: they either had to admit to hiding money offshore before the end of the year, or risk their names being discovered when Switzerland shares data it’s collecting now with their home governments in 2018.
The fourth quarter “was an acceleration of a process of regularization,” Ermotti said in a Bloomberg Television interview on Friday.“We do expect similar outflows that we saw in ’16 for this year. We do see a little bit of tapering in ’18.”
Shares Fall
Credit Suisse Group and Julius Baer Group, the second and third-largest Swiss wealth managers, have also cited government tax programs in countries such as Brazil and Mexico as reasons for the loss of client assets last year. Both banks are scheduled to report earnings in February.
UBS fell 3.4 percent at 3:27 p.m. in Zurich, paring gains in the past six months to 21 percent. Credit Suisse fell 3.3 percent and Julius Baer declined 2.8 percent.
UBS’s profit before tax rose to 848 million francs ($847 million) from 234 million francs a year earlier. Higher interest rates in the U.S. and improved investor confidence there should help offset the impact of negative central bank rates in Switzerland and the euro region, UBS said on Friday.
“We do see a readiness and planning for investments, not only potentially financial markets but also in the underlying businesses,” Ermotti said about the bank’s clients. “But it’s quite clear investors are looking for concrete actions by the new U.S. administration in order to then go into investment mode.”
‘Very Negative’
Wealth management Americas, the firm’s U.S. brokerage, reported a pretax profit of 339 million francs, compared with 14 million francs a year earlier, as rising stock markets and higher interest rates in the U.S. lifted earnings. The gain was driven by lower provisions for litigation and higher recurring fees and net interest income, the bank said, even as clients pulled a net $1.3 billion during the quarter.
There “is clearly a U.S. momentum,” Ermotti said in an interview in Davos at the World Economic Forum earlier this month. He said at the time that he expects to add about $50 billion in new assets across wealth management and asset management this year, with the U.S. looking like a “promising market” for the bank.
At the investment-banking unit, led by Andrea Orcel, pretax profit rose to 306 million francs from 80 million francs a year earlier. Revenue from trading equities rose 22 percent in the quarter from the previous year, as income rose in all products. Underlying revenues from trading fixed income and currencies, adjusted for a disposal, fell as high volatility weighed on emerging market products, foreign exchange and interest rate options.
Litigation Costs
UBS, among the few European banks still facing a U.S. probe into sales of mortgage securities, set aside 162 million francs during the quarter to cover litigation expenses, less than the 544 million francs analysts had expected. The bank has 3.2 billion francs in reserves for all legal matters, including $1.4 billion for claims related to residential mortgage-backed securities, little changed from the previous quarter.
Credit Suisse and Deutsche Bank AG last month agreed to a combined $12.5 billion in settlements to end similar Justice Department probes. Royal Bank of Scotland Group Plc said Thursday that it will take a 3.1 billion-pound ($3.9 billion) charge in its fourth-quarter results for mortgage securities litigation.
“While they had lower litigation expenses than expected, the large outflows across all divisions are very negative,” said Daniel Regli, a Zurich based analyst at MainFirst.
To contact the reporters on this story: Jan-Henrik Förster in Zurich at [email protected] ;Jeffrey Vögeli in Zurich at [email protected] ;Giles Broom in Geneva at [email protected] To contact the editors responsible for this story: Michael J. Moore at [email protected] Christian Baumgaertel, Cindy Roberts