BREAKINGVIEWS-Answer to UBS’s chronic US problem may be M&A

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, Feb 4 (Reuters Breakingviews) - Sergio Ermotti has a U.S. problem. The UBS UBSG.S boss acknowledged as much on Tuesday by releasing some new targets for the Americas wealth unit, which has $2.1 trillion of invested client assets yet only managed a 9% pre-tax profit margin next year. Ermotti’s plan is to get that figure to 15% by 2027, which still looks too low. Buying something could be the long-term answer.

The $105 billion Swiss bank reported full-year 2024 results on Tuesday, after which its share price dropped 6%. The most plausible explanation is that investors disliked UBS’s forecast for falling net interest income in the Swiss business and global wealth, which is down to interest rates and largely out of the bank's hands.

What Ermotti can focus on, in addition to continuing the Credit Suisse integration, is turning around the perennially underperforming Americas wealth unit. Profitability has suffered in recent years as rates rose, which prompted rich clients to put money into high-yielding fixed-income products like money market funds. That deprived UBS of cheap deposits and also tilted revenue towards portfolio management fees, where the bank's financial advisers keep most of the value. The unit’s pre-tax profit margin slipped from an average of 15% between 2019 and 2023 to 9% in 2024. Ermotti hopes to reverse that trend by getting UBS’s tentacles deeper into super-wealthy clients, courting the workaday rich, and offering more classic banking services like lending.

But even if he gets the margin back up to 15%, as planned, that’s not much to cheer about. Morgan Stanley’s MS.N wealth-management pre-tax margin will be 30% in 2027, according to analyst forecasts gathered by Visible Alpha. One key difference is scale: the U.S. bank’s relevant unit had $6.2 trillion of total client assets on Dec. 31, compared with UBS’s roughly comparable figure of $2.1 trillion.

M&A could help. The dream deal would be brokerage-to-wealth giant Charles Schwab SCHW.N, but at $151 billion or thereabouts it’s far too big. Rolling up independent boutiques would take time, but some larger players like Ameriprise Financial AMP.N have wealth and financial-advice units that would add more heft.

Even buying a non-wealth group would help support the weight of running a regulated U.S. entity. Raymond James Financial RJF.N, the diversified $33 billion group, would bring a host of new wealth customers while also boosting UBS’s investment banking chops. A classic bank, like $20 billion Citizens Financial CFG.N, would bring cheap deposit funding and wealthy but not super-rich customers. In other words, Ermotti might have one deal left in him after finishing integrating Credit Suisse.

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CONTEXT NEWS

UBS on Feb. 4 said it was targeting a 15% pre-tax profit margin in its Americas wealth business in 2027, compared with 9% in 2024. The unit manages $2.1 trillion of invested client assets, which is roughly the same as the bank’s Swiss, Asia-Pacific, European and Middle Eastern units combined.