(Recasts with more detail)
ZURICH, Jan 21 (Reuters) - UBS Group missed profit and cost targets for 2019 as wealthy clients pulled money in the fourth quarter, adding to chief executive Sergio Ermotti’s challenges as he dials back some of the bank’s financial goals.
Ermotti, who successfully pivoted UBS away from investment banking to wealth management nearly a decade ago, is under pressure to retain UBS’ edge in the business of managing money for the rich amid ultra-low interest rates and increased competition from U.S. rivals.
Outflows from two large clients in Latin America and the United States contributed to a $4.7 billion outflow of net new money last quarter. Ermotti described the lost business as low margin and said Switzerland’s largest bank was dropping a goal of net new money growth of 2%-4% a year as low interest rates weigh on cash holdings.
“We have always believed that in this regard (to net new money), quality beats quantity,” Ermotti told investors and analysts on a call.
Ermotti wants to focus UBS on profit growth and the bank reiterated ambitions for its wealth management unit even as it scrapped targets for other divisions.
Ermotti is relying on new wealth management co-head Iqbal Khan, who he hired from Credit Suisse last year, and his U.S.-based counterpart Tom Naratil to overhaul the division by axing hundreds of jobs and giving more power to individual units to boost lending.
Shares in the bank dropped 5.5% in early trade, the biggest decliner on the STOXX 600 index, wiping out all of the gains earned since the wealth unit reorganisation was announced in early January.
UBS’ rivals have followed its strategy of cutting trading risk in favour of wealth management and the battle for clients along with ultra-low interest rates and the threat from passive investing have made it harder to compete.
Credit Suisse Group AG, Switzerland’s second-biggest bank and UBS’ main rival, in December lowered its profitability targets after reaching a 7.8% return on equity in the first nine months of 2019.
U.S. rivals, however, have fared better. Morgan Stanley , which is seeing the fruits of a long-term push into wealth management, raised the bar for profit from its wealth division over the next two years after reporting a return on tangible equity of nearly 13%.
UBS is now targeting an overall return on core capital (RoCET1) of 12-15% through 2022 after posting a 12.4% return last year, below a 15% goal. It is targeting a 75-78% cost-income ratio in the same period.
UBS’ finished the year with a 129% rise in net profit for the final quarter of 2019, but that performance benefited from a comparison with the final months of 2018 when a market rout hurt earnings. Profit for the full year fell 5%.
Ermotti put UBS in what he described as ‘fuel saving’ mode last year to reduce costs, including freezing hiring, slashing bonuses and delaying spending.
But it has been hit by sliding profit and sluggish activity among its wealthy clients and the rise of passive investing which undercuts the high-fee, private banking model.
Earnings at its wealth management division, the world’s largest with $2.6 trillion in assets under management, rose 4.4% during the year while the investment banking division saw its profits nearly halve after revenues shrank across each of the first three quarters.
Editing by Michael Shields, Christopher Cushing and Carmel Crimmins
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