(Bloomberg) -- UBS Group AG reminded investors at second-quarter earnings of a business it hardly talks about.
The lender’s investment bank, under the leadership of Rob Karofsky until last month and now run by George Athanasopoulos and Marco Valla, outperformed the flagship wealth management business. The unit’s traders, armed with a slew of deal makers brought over from Credit Suisse as well as a team poached from Barclays Plc, had their best second-quarter on record.
That’s a turnaround for a division that only returned to profit in the first months of this year, after ingesting the remains of its problematic Credit Suisse counterpart. It also serves notice that the investment bank, sometimes talked about as a way to guide newly-rich entrepreneurs into the arms of wealth managers, can deliver robust profits in its own right.
Total revenues, excluding some accounting benefits, rose 26% year on year to $2.5 billion, higher than analyst expectations. Underlying pre-tax profit was $412 million, another beat. The division posted a 9.7% return on equity.
UBS has traditionally pursued a capital-light investment banking model, capping the resources allocated to it. That has made it sub-scale compared to similar units at Wall Street peers including Goldman Sachs Group Inc. and Morgan Stanley.
The unit that trades and hedges securities for institutional clients and advises companies on mergers & acquisitions grew in size with the rescue takeover of Credit Suisse. That’s even as UBS is winding down many of Credit Suisse’s trading businesses and letting go of hundreds of bankers.
“We are gaining market shares, particularly in the US,” Chief Executive Officer Sergio Ermotti said on a call with journalists on Wednesday. “It’s only a matter of time for those results to be fully appreciated and understood by the broader market.”
UBS investment bank results match a broader trend. Deutsche Bank AG saw revenue double at its business that advises on deals, stock and bonds; the German bank posted a 10% increase in revenue for its broader investment bank. JPMorgan Chase & Co.’s fees from investment banking soared 50%, with the firm’s equity traders notching a 21% revenue jump this quarter.
Ermotti dramatically downsized the firm’s investment bank during his first term in charge from 2011 after a government bailout and losses helped prompt the pivot to the more stable wealth management business that the firm has focused on since. The unit now accounts to roughly 20% of risk-weighted assets — that compares with Barclays, for example, where roughly half of assets are allocated to the investment bank.
Analysts at Goldman Sachs Group Inc., Barclays and Deutsche Bank AG highlighted the better-than expected performance in the investment bank.
In equities, revenues rose 17%, ahead of Bloomberg compiled estimates.
Another bright spot was advising companies on strategic initiatives and capital measures. Underlying revenues rose 23% to $239 million as UBS on-boarded Credit Suisse bankers, as well as dozens of senior Barclays bankers in the US — including Valla who co-leads the division.
M&A fees are a lucrative source of fee income for banks, particularly now as declining interest rates in Europe and elsewhere may ease the way for takeovers.
UBS has advised on a few high-profile deals already this year including Swisscom AG’s acquisition of Vodafone’s Italian business, BBVA’s hostile takeover attempt of Banco de Sabadell SA and Nationwide’s acquisition of Virgin Money.
In the US, UBS advised on the $10.1 billion sale of Truist Financial Corp’s insurance brokerage business.
“We’re building up a very compelling pipeline of mandates that have not been announced yet, “Ermotti said on a call with analysts. “We see a good pipeline and momentum in winning mandates but of course it will depend on market conditions.”
His comments square with that of many rival banks including Barclays. JP Morgan Chase & Co., and Citigroup results were also helped by a revival of M&A and debt issuance activity. Some corporates remain cautious given uncertainty about the interest rate trajectory. The value of deals globally rose 13% to $1.5 trillion in the first half with some 10-billion-dollar plus deals.
Given the volatility inherent in investment-bank earnings, UBS’s overall strategy remains built around its wealth management offering, which accounts for about half of revenues. In July the bank elevated previous investment-bank head Karofsky to co-lead the wealth management division with Iqbal Khan, signaling a renewed focus on growth in the US and Asia.
(Updates with Truist deal)
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