Results unsatisfactory: UBS’s unresolved US issue

Unlike Switzerland, UBS advisors in the US generally operate under their own company names. Top-selling financial advisors are in high demand and therefore change banking partners more frequently. Therefore, most of the income remains with the consultants, not the bank.

For example, almost 89 cents of every dollar of revenue at UBS’s American wealth management business is spent on costs such as advisory commissions. For comparison: in the Swiss asset management business this cost-to-income ratio is only a good 55 percent.

Although UBS carries large volumes in the US, little is visible as a result: only $307 million in pre-tax profit remains on revenue of $2.6 billion in the third quarter; which is less than in Switzerland. UBS employs about 60 percent of its wealth management advisors in its American business, but they generate only about a third of the division’s pretax earnings.

“Although UBS has managed to significantly increase assets under management in the US since 2017, pre-tax profits from US asset management are expected to fall to around $1.3 billion in 2023,” complains Vontobel banking analyst Andreas Venditti.

The problem: UBS is something of a “woman without a belly” in the US business world. For wealthy U.S. clients, UBS is a second bank where clients handle securities transactions but almost no profitable loans. UBS isn’t even used for payment processing in the US.

To refinance more loans cheaply, UBS will need a stable deposit base like Switzerland’s. Wealthy US customers also bring cash, but as soon as there is interest somewhere, the money runs out quickly. UBS’s US deposit base is therefore much more volatile compared to rivals such as JP Morgan.

US rival Morgan Stanley had exactly the same problem. And that problem was solved four years ago with the $13 billion acquisition of online broker E-Trade. The deal had little intention of pleasing retail customers with cheap online business; Rather, Morgan Stanley was after billions of dollars that E-Trade customers had left unused in their accounts. This is an excellent way to refinance loans for wealthy customers. “We will also need such a feeder channel,” says a UBS executive.

Takeover targets are rare

But one thing is clear: the topic of “new acquisitions” will be off the table in the next three years. Even if a deal were possible in the US, there is no takeover target like E-Commerce. Rival Charles Schwab has already acquired another major online broker, TD Ameritrade, and with a market cap of $117 billion, it is now worth much more than UBS.

Ermotti’s predecessor, Ralph Hamers, was looking to enter the US with robo-advisor Wealthfront two years ago. However, the deal failed due to high price due to resistance from UBS shareholders. It is also said that regulatory authorities in the USA are resistant. As a source of customer deposits, Wealthfront was too small to solve UBS’ financing problem.

So Khan needs to expand and diversify his US business; otherwise there will be no further profit contribution from the US. One hope now is that, thanks to the CS acquisition, UBS will bring on board many new clients from Latin America who want to establish banking connections in the US. “We have clients who want to go to the US, we need to do more here,” says a UBS banker.

U.S. tax-free profits thanks to losses carried forward

From a capital market perspective – and therefore for new shareholder Cevian – higher US profits are a kind of Holy Grail because profits are effectively tax-free. Because UBS still benefits from a tax perspective from the near-crash of 2008. According to its annual report, there are still over $13 billion in unused tax credits in the U.S. alone.

However, these tax credits for losses incurred before 2017 cannot be carried forward in the US indefinitely. These expire after twenty years, according to the annual report. This gives a certain urgency to the “Profit Turbo” project in the USA. And Ermotti and Khan need to move forward with all their might in addition to CS integration.