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What's going on?
Shares of UBS dropped 4% on Friday. The Swiss bank reported its financial results and said clients had withdrawn billions of dollars from its wealth management business. (tweet this)
What does this mean?
About four years ago, UBS underwent a massive restructuring: it shifted its focus and resources from its investment bank (e.g. trading stocks and bonds with institutional investors) towards its private wealth business (e.g. managing rich individuals money). The idea was that the banks business model would become less risky and that its private bank would offer a steadier return. At the time, investors rewarded the plan by sending UBSs shares sharply higher compared to other European banks. However, with its private clients now withdrawing money from the bank, it has investors nervous…
Why should I care?
For the markets: Swiss banks are facing some specific headwinds.
Historically, Swiss banks offered the worlds wealthy a discrete place to put their money. But, in recent years, the regulatory tide has turned against Swiss banks: Switzerland has instituted laws that have significantly increased transparency. Also, other countries have employed repatriation schemes that have encouraged their citizens to return money to their home country (e.g. an amnesty, of sorts). In short, its becoming less attractive for rich people to use Swiss banks to manage their wealth which is hurting UBSs earnings and bodes poorly for competitors like Credit Suisse.
The bigger picture: This is another example of challenging circumstances for the wealth management industry.
UBS is not just facing client withdrawals, its also making less in profit for every dollar it manages: the margins in its wealth management division are at their lowest level ever. Its another signal that making money by managing money is a tougher business than it used to be.
Originally posted as part of the Finimize daily email.
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