What's going on?
Switzerland can boast about its confectionery, sure, but it might not want to shout about its banking giant: UBS reported weaker-than-expected 2019 profit on Tuesday, and its shares melted 5%.
What does this mean?
Choppy market conditions, weak client activity, and tough competition from US rivals saw UBS’s profit from its investment banking business halve in 2019. And with negative interest rates in Europe – which limit how much money the bank makes from loans – it’s perhaps no wonder the Swiss giant is so focused on the rich people (including half the world’s billionaires) in its flagship wealth management business.
That strategy seems to have paid off so far, with wealth management’s profit proving more resilient than investment banking and climbing 4% from a year ago. UBS is now hoping to cut costs in that area, in an effort to hit 10-15% profit growth this year. The bank may want to focus on retaining big spenders first, mind you: its clients pulled almost $5 billion out of the bank’s wealth management division toward the end of 2019…
Why should I care?
The bigger picture: The grass really is greener.
UBS reduced its overall profit targets for 2020, and it’s not alone in doing so in this era of negative interest rates. Other European banking giants, like Credit Suisse, Deutsche Bank, and UniCredit, have recently dialed back their ambitions and cut thousands of jobs – all while US rivals post record profits.
Zooming out: Low rates, low spirits.
UBS has been hit hard by the Swiss National Bank’s ultra-low interest rate policy, which has interest rates entering their fifth year in negative territory. British banks may be watching nervously: after disappointing data showed the UK economy shrank in November, investors are now expecting the British central bank to cut interest rates by the end of this month. And while that might stimulate the economy, it doesn’t bode too well for British banks’ profitability…