UBS chief executive Sergio Ermotti has hit out at critics of share buybacks as the Swiss lender considers returning more capital to shareholders in the coming months after a challenging first half.
The bank reported an 11 per cent drop in second-quarter profits on Tuesday, with a strong performance at its investment bank offset by a rise in provisions for bad loans stemming from the coronavirus crisis.
UBS said it had built up $3.6bn in capital and was considering resuming cash dividends and share repurchases this year.
“Share buybacks have been demonised way too much,” said Mr Ermotti in a call to analysts. “Share buybacks in an environment like this one are an excellent way for banks to retain flexibility in their capital return policies.
“[When] bank stocks are trading below tangible [book value], it’s the most natural way to create value for shareholders.”
UBS and rival Credit Suisse bowed to pressure from the Swiss regulator, Finma, in April to suspend dividend payments during the depths of the crisis. Mr Ermotti said UBS had not yet discussed future buybacks with Finma and that any decision would be based on the bank’s capital position and outlook.
The Swiss bank made $1.2bn in net profit in the quarter, thanks in part to a 43 per cent surge in earnings at its investment bank, echoing the strong gains reported by Wall Street lenders this month.
But it also announced it had added $272m of loan loss provisions, bringing its total this year to $540m.
Consultancy Oliver Wyman has estimated that European lenders could be hit with €400bn in bad debts over the next three years, rising to €800bn in its worst-case scenario.
UBS is the first large European investment bank to report second-quarter earnings. Wall Street rivals have already reported their best quarter for trading in a decade thanks to busy financial markets and central bank stimulus.
“UBS’s second-quarter results demonstrated resilience against the disruptive effects of the coronavirus pandemic,” said Michael Rohr, a senior vice-president at Moody’s, the rating agency.
UBS’s common equity tier one ratio, a measure of its financial strength, rose from 12.8 per cent to 13.3 per cent over the quarter. The bank’s share price rose 3.5 per cent to SFr11.60 in morning trading.
UBS has a large legacy business in the US, but has refocused its attention on expanding in Asia. The group’s Asia-Pacific profits rose 70 per cent compared with the same quarter last year to $233m.
Mr Ermotti said UBS had seen little evidence that Hong Kong China tensions were affecting client decisions in the region.
“We are monitoring the situation carefully,” he said, adding that the bank was also focused on how its US clients would react to the upcoming presidential election.
In April, UBS reported a 13-fold increase in loan loss provisions compared with last year, with expenses for bad loans hitting $268m. Net profits rose 40 per cent during the first quarter, nonetheless, thanks to a strong performance by its wealth management business and investment bank.
Mr Ermotti is due to leave UBS at the end of October, having led the bank for nine years after it was bailed out during the financial crisis. He will be replaced by Ralph Hamers, the former chief executive of Dutch lender ING.
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