UBS Group AG on Tuesday posted a surprise profit for the first quarter of 2023, slightly more than expected. This stunning performance was fueled by both a rebound in client activity and a giant spike in investment banking revenues. The Swiss banking behemoth is not immune from the wider pernicious effects of escalating global trade friction. Furthermore, the drop in net interest income points to its future competitiveness.
The bank returned a net dividend of $1.692 billion to its shareholders. That eye-popping number was well above the $1.359 billion analysts were expecting, based on a poll by LSEG. UBS, on the other hand, knocked it out of the park this year. Its shares were down nearly 10% year to date after the White House on April 2 announced tariffs on key global trade partners. UBS for its part has been very opposed to any more restrictions. They claim that new obstacles are more likely to harm their competitive advantage as one of the most well-capitalized companies out there.
UBS’s group revenue came in at $12.557 billion, missing consensus of $12.99 billion from analysts. The bank’s Common Equity Tier 1 (CET 1) capital ratio remained robust at 14.3%. This ratio is in line with its all-time high level a year ago in December 2022 quarter. The company pointed to a decrease in net interest income (NII), which was $1.629 billion. That’s a 16% decline compared to last year, and an 11% decrease compared to Q4 of 2022.
UBS expects a small drop in net interest income across its Global Wealth Management segment in the second quarter. They expect that overall decline to be a low single-digit percentage. Watch for Personal & Corporate Banking’s net interest income to drop, in Swiss francs. In terms of US dollars at prevailing foreign exchange rates, it is likely to see a gain of mid-single digit percentage.
“In the second quarter we expect net interest income (NII) in Global Wealth Management to decline sequentially by a low single-digit percentage, and we see a similar decline in Personal & Corporate Banking’s NII in Swiss francs. In US dollar terms, Personal & Corporate Banking’s NII is expected to increase sequentially by a mid-single-digit percentage, based on current foreign exchange rates.” – UBS
UBS is committed to staying ahead of the curve, even in the face of these challenges. The bank’s investment banking arm saw an astounding 32% YOY revenue increase thanks to its global markets unit. This spike was driven by higher client volumes in equities and FX globally.
Unlike UBS’s stellar comeback, the bank is coming under greater and greater pressure from the Swiss government. Swiss President Karin Keller-Sutter acknowledged the importance of effective ring-fencing of UBS’s systemically important components within Switzerland. She emphasized that this separation is key to ensuring long-term financial sustainability. She applauded the Federal Council’s promise of legislation that would ensure UBS could be made resolvable in a crisis.
“The Federal Council has one goal: that in the event of a crisis, a UBS that is systemically important is resolvable. This means that the systemically important parts of the bank can be separated in Switzerland. That must be the goal of the Federal Council and the new legislation.” – Swiss President Karin Keller-Sutter
Notably, the president has praised UBS’s lobbying efforts. Yet, at the same time, he implored the Federal Council to put the interests of the taxpayer first despite any outside forces.
“UBS’s lobbying is both visible and unmistakable. It’s clearly resonating in various places. But once again: the Federal Council cannot be intimidated by lobbying, but must also represent the interests of taxpayers.” – Swiss President Karin Keller-Sutter
The effect of global trade tensions on UBS’s business model is also unavoidable. Since then, the share price of the company has tanked. This drop reflects generalized market fears over the direction of U.S. trade policies and their effects on international financial markets. UBS is the second largest bank in Europe by market capitalization after LVMH. Its challenges are not limited to its balance sheet; they rattle investor confidence across the entire sector.
To be competitive, UBS has focused almost all of its invested assets to the Americas region. This singular focus makes the bank susceptible to abrupt changes in the global economic climate. Increasing tariffs and general trade restrictions create a real profitable hurdle for the bank. Each of these concerns may have permanent implications for its success, particularly if the policies persist or exacerbate over time.
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