A dramatic drop in earnings from private banking sent the share price of UBS AG plunging Tuesday as investors suddenly lost confidence in the Swiss banking company's vaunted global wealth management business.
UBS reported that net third-quarter income rebounded sharply, to $770 million, from a loss of $588 million last year. But investors focused on a 42% decline in pretax earnings from private banking, to $410 million, and a 2.6% drop in assets under management, to $414 billion. The stock plunged 4.6%, to $287, in trading on the Zurich exchange.
"It's a significant change, it's pretty disappointing, and the market has reacted pretty realistically,'' said John Leonard, a banking analyst at Salomon Smith Barney in London. "It would be hard to argue that this is going to be the great growth business of the future."
Analysts noted most of the gains came from a surge in trading profits at Warburg Dillon Read, the investment banking unit of UBS. They said a variety of troubles afflicted the private banking business, including ongoing difficulties integrating the operations of the former Swiss Bank Corp with Union Bank of Switzerland. The two merged last year to form the world's fifth-largest banking company, with $687 billion of assets.
Analysts also blamed the swoon on a decision to increase the minimum balance required to open a private banking account to $650,000 from $160,000; the departures of account executives, who took their customers with them; and costly investments.
"You would expect to see annual growth of assets under management of about 5% to 6% for major players and double-digit growth for smaller, higher-quality entities like Bank Julius Baer," said Adrian Pelz, a banking analyst at Fox-Pitt, Kelton in London. "The fact that UBS has declined shows that they have serious problems with the business."
The steep drop in profits - from a business that the two Swiss banks until recently viewed as a cash cow - prompted analysts to suggest that large-scale global private banking may not be as lucrative in the future as it has been until now.
Growing competition from Internet discount brokerage services and from smaller and more specialized banks, as well as increasing customer disenchantment with off-the-shelf products, are likely to cut into earnings at big private banking operations, the analysts added.
"Basically, the concept of bigger is better has yet to be seen. UBS is going to have to refocus on what it is doing, and whether they can will be seen over the next six months," Mr. Pelz said.
A spokeswoman for the UBS in Basel, Switzerland, rejected the argument that the company has run into difficulties with private banking. She said most of the earnings decline could be attributed to one-time investments in technology and new offices in Singapore, Hong Kong, France, Italy, and Germany, and to staff buildups in major financial centers around the world.
In one of its largest recent acquisitions. UBS agreed in September to purchase Bermuda-based GAM Global Asset Management for $575 million to $675 million, the price depending on the amount of assets under management at GAM. That number right now is about $14 billion.
UBS' third-quarter results "were in line with expectations," the spokeswoman in Basel said. "One quarter doesn't make a trend, and we think private banking is on the right track."