UBS has captured the spotlight in the banking industry with its outstanding third-quarter 2024 performance. Reporting a net profit of $1.4 billion — nearly double the $740 million Wall Street analysts had expected — the Swiss bank has proven its strategic prowess in a challenging global economic environment. This success story is underpinned by several key factors that reflect both short-term wins and long-term planning.
In the third quarter of 2024, UBS’s Wealth Management and Investment Banking divisions were significant contributors to the bank’s profitability. The Wealth Management division reported a pre-tax profit of $1.3 billion, marking a 30% increase from the previous quarter. This surge wasn’t accidental. UBS has been focusing heavily on personalized client services, particularly for ultra-high-net-worth individuals, a market segment that welcomed $6 billion in fresh inflows from Asia during the quarter.
Meanwhile, the Investment Banking division reported $2.6 billion in revenue for the third quarter of 2024, a 22% increase driven by elevated trading fees. This surge was influenced by heightened market volatility in October, stemming from geopolitical tensions in the Middle East and mixed economic indicators in the U.S., creating fertile ground for busy traders. UBS capitalized on these conditions with swift, data-driven decisions that outperformed many of its peers.
During the 3rd quarter of 2024, the S&P 500 experienced significant intraday swings, creating numerous trading opportunities, as noted by market analysts. UBS’s CEO, Sergio Ermotti, has emphasized the importance of the bank’s ability to swiftly adapt to market shifts and effectively serve clients during volatile times, highlighting this as a key strength of the institution.
Notably, UBS has leveraged technology to bolster trading operations. The implementation of advanced AI algorithms for market analysis has significantly contributed to its trading operations’ efficiency and profitability. These tools enabled traders to adapt quickly to market swings, a necessity in a period where the VIX (Volatility Index) peaked at its highest level in two years.
In a research note earlier this year, Sundeep Gantori, UBS Equity Strategist (Global Tech), Global Wealth Management, said “We expect AI industry revenues to grow 15x from USD 28bn in 2022 to USD 420bn in 2027E, or a CAGR of 72%,” further deepening the expectation curve for the direction the giant bank is headed.
Smart Cost-Cutting Measures
Behind the scenes, a relentless focus on efficiency has amplified UBS’s profitability, with the bank achieving $800 million in cost reductions during the third quarter alone, bringing the total to approximately $6.8 billion in annualized exit rate gross cost savings compared to the combined 2022 cost base of UBS and Credit Suisse. These savings stem from various initiatives, including the ongoing integration of Credit Suisse, which has streamlined operations across regions.
One clear example is how the bank has streamlined its branch network in Switzerland after merging with Credit Suisse. UBS is planning to close 85 branches by 2025, trimming the total number from 285 to about 190. This is part of a broader plan to save $13 billion by 2026, with $7 billion targeted by the end of 2024. Additionally, UBS is transitioning over half its IT systems for the next five years to Microsoft Azure to modernize its infrastructure and cut costs, further supporting its efficiency drive.
UBS has announced plans to reduce its workforce by approximately 30%, equating to about 35,000 positions, following its acquisition of Credit Suisse. This reduction is part of a broader strategy to achieve annual cost savings of $13 billion by the end of 2026. The job cuts are expected to occur progressively, with large chunk reductions anticipated in 2025 and 2026 starting from 3,000 jobs in Switzerland.
“I know people nowadays hate banks making money, but there is nothing worse than banks losing money — and particularly if they have a reputational issue,” Ermotti noted.
The bank’s strategic decision to automate back-office functions is another noteworthy mention. UBS has focused on automating back-office tasks to save money and improve efficiency. By using AI and robotic process automation (RPA), the bank has cut loan processing times from 30-40 minutes to just 5-6 minutes per request. These changes are also helping reduce compliance costs and are expected to save UBS up to $13 billion by 2026.
The savings are not only helping the bottom line but also enabling USB to reinvest in growth areas like ESG advisory services. According to a UBS Asset Management report, the bank is actively supporting and involved in at least 69 initiatives related to ESG, with $441 billion actively managed assets integrating ESG, and has supported 64% of over 600 shareholder resolutions on ESG issues including 88% of environmental resolutions, at the time.
Effective Risk Management
In a year marked by economic uncertainty, UBS’s disciplined approach to risk management has been a key differentiator. The bank maintained loan default rates below 1% in Q3, significantly lower than the industry average for high-yield bonds and leveraged loans, which are expected to be around 3.5%-4.0% and 5.0%-5.5% respectively, according to various industry reports.
UBS has fortified its credit portfolio by carefully adjusting its exposure to struggling sectors like real estate, which has faced significant global headwinds. For instance, the U.S. commercial real estate market has experienced a decline in asset values, with some reports indicating a decrease of about 20% from their peak in 2022. UBS’s cautious lending practices and active management of its increased exposure (from $47.1 billion in 2022 to $55.09 billion in 2023) following the acquisition of Credit Suisse have helped shield it from major losses.
One of UBS’s standout achievements in Q3 was its seamless management of Credit Suisse’s derivatives book, a potential minefield. By carefully unwinding high-risk positions, UBS avoided huge losses many feared and demonstrated its expertise in risk management.
A Fresh Outlook with Credit Suisse Integration
The acquisition of Credit Suisse has been a transformative move for UBS, significantly enhancing its client asset base. In October 2024, UBS completed client migrations in Luxembourg and Hong Kong. The bank plans to migrate client accounts in Singapore and Japan before the end of 2024, with migrations in Switzerland scheduled to commence in 2025. While UBS anticipates substantial asset inflows from these migrations, specific figures have not been publicly disclosed.
Beyond the numbers, the integration has expanded UBS’s market share in key regions. In the third quarter of 2024, UBS’s Global Wealth Management division recorded net new assets of $25 billion, with strong contributions from the Asia Pacific region. This success underscores the strategic value of the acquisition, which has enhanced UBS’s presence in the Asia-Pacific region—a market that has demonstrated notable growth in high-net-worth individual wealth and population, as highlighted in the Capgemini World Wealth Report 2024.
Ermotti remarked, “We are starting the migration of clients from the Credit Suisse platform into the UBS platform. This is going to go on for another 18 months or so.”
The integration has not been without challenges. UBS has had to manage cultural differences and regulatory hurdles across jurisdictions. However, the bank’s careful planning and open communication with stakeholders have ensured a smooth transition, earning it praise from industry observers.
Yet, UBS benefited very well from market conditions starting from Q1, then, in Q3, with increased volatility driving trading volumes higher. UBS’s Global Markets division reported a 33% increase in revenues during the third quarter of 2024, driven by strong performances in both equities and fixed-income trading.
Part of this success can be attributed to UBS’s diversified trading portfolio, which includes equities, bonds, and commodities. The bank’s commodities desk experienced a significant increase in revenues, driven by heightened trading activity in October. During this period, Brent crude oil prices fluctuated between approximately $71 and $78 per barrel amid geopolitical tensions in the Middle East.
UBS’s ability to adapt quickly to market conditions also played a role. The bank introduced new structured products tailored to clients’ evolving risk appetites, contributing to a notable increase in revenue this quarter. UBS’s innovative trading strategies have reinforced its strong position in the derivatives market, contributing to its overall financial performance.
UBS’s strong performance in trading revenues reflects the bank’s ability to stay ahead of market trends.
Enhanced Client Engagement and Net New Assets
UBS’s ability to attract and retain clients is evident in the $25 billion in net new assets it reported in Q3. This figure reflects not only new clients but also the confidence of existing ones, who have increased their investments with the bank.
One standout area is UBS’s ESG-focused portfolios, which have seen significant inflows, reflecting the growing investor interest in sustainable investing. These portfolios have been particularly popular among millennial and Gen Z investors, demographics that UBS has been actively engaging through initiatives like the acquisition of Wealthfront.
The bank’s digital tools have amplified these efforts, with its “UBS Key4” digital banking platform witnessing rapid growth and active usage. UBS has been expanding its client engagement efforts through exclusive events and webinars, bringing together clients to discuss market trends and investment strategies. These initiatives are not only retaining clients but also deepening their investment commitments.
“Wealth needs careful stewardship, and managing it properly needs time, dedication, and passion,” said Iqbal Khan, Co-President of UBS Global Wealth Management and President of UBS Asia-Pacific. “As the world’s only truly global wealth manager, we understand the shifts and changes in global and local wealth and translate this into opportunities and outcomes for our clients.”
A Smoke With Fire
On capital position, UBS’s strong capital base remains a cornerstone of its success. With a Common Equity Tier 1 (CET1) ratio of 14.3%, UBS maintains a strong capital position, though some global banks report higher ratios. This financial strength provides a buffer against market uncertainties and supports the bank’s growth ambitions.
The bank’s liquidity coverage ratio stood at 199.2% in Q3, significantly exceeding the regulatory requirement of 100%. This robust liquidity has enabled UBS to pursue strategic initiatives without compromising financial stability.
Furthermore, UBS has been actively returning value to shareholders. The bank announced a share repurchase program of up to $2 billion, with up to $1 billion expected to be repurchased in 2024, a move that aims to bolster investor confidence. UBS’s stock price rose approximately 1.75% in October, reflecting positive market sentiment.
UBS’s third-quarter 2024 performance is a reflection of its ability to handle complex and challenging changing financial times. Through strategic moves in wealth management, investment banking, cost-cutting, and risk management, the bank has set itself apart as a leader in the global banking sector.
As UBS looks to sustain this momentum, its focus on innovation, client engagement, and disciplined financial management will be critical. But whether these approaches continue to yield needed results in the face of the changing global banking economy as we go along remains to be seen. Notwithstanding, UBS so far is leaving behind healthy footprints, as it is shaping the future of banking.
Author: Richardson Chinonyerem
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