Earnings

UBS third-quarter profit slumps; investment banking down 59% on 'persistent' negative rates

Key Points
  • The bank's net profit attributable to shareholders for the third quarter came in at $1.049 billion.
  • This is lower than the $1.253 billion figure reported in the same quarter in 2018.
  • The lender continues to face headwinds in its investment banking and global wealth management business.
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Swiss lender UBS saw a 16% drop in its third-quarter net profit, compared to the same period last year, and a 59% slump at its investment banking unit amid a "challenging environment."

The bank's net profit attributable to shareholders for the third quarter came in at $1.049 billion. This is lower than the $1.253 billion figure reported in the same quarter in 2018.

Here are some key highlights for the quarter:

  • Operating income hit $7 billion, versus $7.5 billion a year ago.
  • Return on tangible equity stood at 8.7%, versus 11.1% a year ago.
  • Common equity tier 1 capital ratio of 13.1%, versus 13.5% a year ago.

UBS also said it expects to take restructuring expenses of $100 million in the fourth quarter of 2019. UBS, like its peers, is looking at ways to restructure as banks continue to face headwinds from low and negative interest rates.

"Low and persistent negative interest rates and expectations of further monetary easing will adversely affect net interest income compared with last year," UBS said in a statement Tuesday. "As we execute on our strategy, we are balancing investments for growth while managing for efficiency," it added.

Rising rates are good for banks since they are able to lend out money to investors at a profitable rate of interest. Lower interest rates restrict a bank's ability to make profits thus adding pressure on margins.

UBS announced in August that it would introduce a 0.6% annual charge on cash savings of over 500,000 euros ($557,642) and 0.75% on savings of over 2 million Swiss francs ($2.03 million) in order to pass on the cost of negative rates.

Speaking to CNBC Tuesday, CEO Sergio Ermotti said: "The entire industry is faced with the same challenge on negative rates, so we are unfortunately forced to pass some of this pain, so we are not really passing all the pain of negative rates but I think it is inevitable that we will see, probably, the rest of the industry following on that."

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Headwinds

UBS continues to face headwinds in its investment banking and global wealth management business. The lender's investment banking unit saw a 59% decline in the third quarter of 2019 in terms of adjusted operating profit before tax.

Investment banking is a specific division of banking related to the creation of capital for other companies, governments and other entities.

Meanwhile, the bank's global wealth management business saw an 2% decline in adjusted operating profit when compared to the same quarter last year.

Addressing the bank's struggles with net interest and recurring fee income, Ermotti said the lender had been able to mitigate lower rates with higher transaction volumes, and was seeking to protect that dynamic.

"When I look at recurring fees, of course there you can see our clients' risk appetite is impacting recurring fees. We see them still buying into mandates but with lower risk profile, therefore with lower margins and in that sense, it was helpful in the third quarter to see the transaction line offsetting some of this," he told CNBC's Joumanna Bercetche.

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—CNBC's Elliot Smith contributed to this report.

Correction: This story has been updated to accurately reflect the fall in the bank's adjusted operating profit at its global wealth management business.