Earnings

UBS posts 11% fall in second-quarter profit as it warns of continued credit losses

Key Points
  • In its outlook, the bank warned that continued group credit losses could be expected in the second half of the year due to the coronavirus pandemic, but said these would be below those seen in the first half.
  • Higher trading activity continued to bolster the bank's earnings in the period.
  • But that was unable to offset the pandemic-induced downturn in its retail and corporate banking units.
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There is complacency, over-optimism in the market, UBS chief says

UBS announced a net profit of $1.23 billion for the second quarter of 2020, down 11% from the same period last year ($1.4 billion) as the coronavirus pandemic weighed on earnings.

Analysts polled by the bank had expected a net profit of $973 million for the quarter.

The Swiss lender had reported a net profit attributable to shareholders of $1.6 billion for the previous quarter, as financial market volatility enabled the operating profits of the Swiss investment bank to surge. However, it had warned of an uncertain future in the coming quarters as the pandemic began to spread throughout the world, eventually bringing the global economy to a standstill.

Higher trading activity continued to bolster the bank's earnings in the period, but was unable to offset the pandemic-induced downturn in its retail and corporate banking units.

Here are the highlights from the second-quarter earnings report:

  • Operating income hit $7.4 billion, versus $7.5 billion a year ago.
  • Return on tangible equity stood at 9.6%, versus 11.9% a year ago.
  • Common equity tier 1 capital ratio of 13.3%, versus 13.3% a year ago.

The results included credit loss expenses of $272 million, of which $110 million came in personal and corporate banking and $78 million in the investment bank.

In its outlook, the bank warned that continued group credit losses could be expected in the second half of the year due to the coronavirus pandemic, but said these would be below those seen in the first half.

UBS also said it was reviewing the mix between cash dividends and share buybacks in light of the elevated uncertainty surrounding the Covid-19 pandemic.

"While it is premature to provide guidance for 2020, going forward the intention is to continue to pay out excess capital and maintain the overall capital returns to shareholders consistent with previous levels," the bank said in its earnings report, adding that share repurchases may continue in the fourth quarter depending on business development and the second-half outlook.

In a statement Tuesday, UBS CEO Sergio Ermotti said: "As we continue to face a challenging environment, we are adapting and accelerating the pace of change, supporting our clients, employees, and the economies in which we operate, while remaining focused on our strategic priorities." Ermotti will be replaced at the helm by ING CEO Ralph Hamers on November 1 this year.

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UBS CEO: Expect severe recession in second half of this year

Second half less 'benign'

Ermotti told CNBC on Tuesday morning that the scale and frequency of potential geopolitical, political and economic events in the second half of the year means more clients will be looking to alter their asset allocation before year-end. He pointed to a UBS client survey which revealed that 61% of clients are considering rebalancing their portfolios after the U.S. election on November 3, regardless of the outcome.

"If I put everything together, I do expect the second half of the year maybe not to be as benign as the first half, but still quite robust," Ermotti told CNBC's "Squawk Box Europe."

He also suggested that there is a degree of either "complacency" or "over-optimism" in financial markets, with most asset classes now at or around their pre-Covid levels despite a multitude of possible tail risks.

"Credit is still not there but has been coming in a lot, and therefore there is not a lot of room for disappointment in the financial markets," Ermotti said.

"In that sense, should the situation deteriorate, I do expect some movements in the market to reflect the new economic data that we will see coming out after the summer."