UBS must target wealth management profit, not volume

For Swiss bank UBS, the days of easy margins earned from tax-evading clients are over and the new focus is on the wealthiest customers with the best profit potential. Analysts believe UBS should pull back from the scramble for assets currently obsessing other wealth managers.
Instead it should cherry-pick clients who will trade frequently, invest in hedge funds and other high-margin products and need investment banking services.
UBS wealth management margins may have recovered to 92 basis points in the final quarter after falling to 89 in the third quarter. But profitability still lags that at peers Credit Suisse and Julius Baer and experts say restoring margins to their former levels is unlikely.
Since the financial crisis, clients are more aware of the commissions they are paying and less willing to accept high charges for complex products that may not protect their capital.
Moreover, a world-wide crackdown on tax evasion has decimated the offshore client base, once the most profitable clients for private banks. "UBS understands there is a structural decline in margins," said Florian Esterer, head of global equities at Swisscanto, which manages 57.4 billion Swiss francs and holds a $140 million stake in UBS.
"Onshore clients hold fewer discretionary assets and higher cash balance, so are less profitable. "For the offshore clients a lot of the value proposition was tax efficiency. As you move from offshore to onshore, you are losing higher margin money and getting less profitable money so you need higher volume to get the same profitability."
UBS wealth management stopped bleeding client money and had 1 billion Swiss francs ($1.08 billion) of new assets in the third quarter, but inflows were flat in Q4 and the bank warned it needed to see more consistent inflows to confirm any uptrend. "They look to have stemmed outflows," said Keefe Bruyette Woods analyst Matthew Clark.
"So from here on, it's about when clients start to become more active and invest in higher margin products. "Private banks do best when their clients are willing to take on more risk."
Clients pulled nearly 400 billion Swiss francs - almost 20 percent of total client assets - from UBS in the preceding 2-1/2 years as the bank came close to collapse in the credit crisis and was hit by a US tax probe and attacks on Swiss bank secrecy by European neighbours. Those setbacks may prove to be a blessing in disguise, as they forced UBS to switch focus to more lucrative client segments sooner than rivals like Credit Suisse and Julius Baer to replace its lost but highly profitable offshore clients.
Also, while US authorities may have made their peace with UBS after the bank paid a fine of $780 million in 2009 and agreed to hand over nearly 5,000 client names, a new US tax probe could engulf Credit Suisse and others.
If attracting the wealthiest clients - those with inevitable assets of at least $50 million - is key to enhancing profitability, then UBS has been doing something right as it looks to dominate the top end of the market. Despite flat 2010 inflows, the bank raked in 10 billion francs from the ultra wealthy, which was at least partially responsible for the fourth-quarter improvement in margins and could underpin future profitability.