Over the past year, few sector pair trades have beaten holding UBS shares against a short position in rival Credit Suisse. That would have earned traders about 60 per cent, net of costs. Full-year figures for UBS on Tuesday showed why.
Last year was UBS’s best for 15 years. Chief executive Ralph Hamers inherited a winning hand. The UBS global wealth management unit is the royal flush, responsible in 2021 for half of group operating profit.
Hamers plans to put his stamp on the unit by expanding into the US. After Asia, it is an obvious hunting ground for wealth managers. But last week’s deal to pay $1.4bn for Wealthfront, a US mass affluent manager with $27bn of client money is an expensive way to increase exposure.
Wealthfront financials are sketchy. The average account holds less than $60,000. That is peanuts compared with UBS’s usual high-end client. Profitability must be low.
UBS is moreover up against serious competition from the likes of Morgan Stanley in US wealth management. It too has an up-and-down investment bank alongside its steady wealth business. But Morgan Stanley trades on 2.5 times its tangible book value, double UBS.
That helps explains Hamers’ focus on buybacks, despite the dilution to book value. The UBS common equity tier one capital ratio finished 2021 at 15 per cent, 200 basis points above its target. That suggests excess capital of more than $6bn, up some $300mn in the last quarter alone. UBS has increased buybacks to $5bn for 2022, well ahead of analyst hopes of $3.2bn. That along with news of stingier cost targets, boosted the share price 7 per cent.
UBS is in a sweet spot. That was reflected in an inflow of $28.9bn for the wealth management unit in the fourth quarter alone, up by half from the same period of 2020. Hamers now needs to lead wealth management through a year when markets may be far tougher on clients. But that could also make US assets more affordable.
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