UBS’s Ermotti Warns of ‘Huge Change’ as Rate Reversal Hits Banks

UBS Group AG Chief Executive Officer Sergio Ermotti joined Wall Street peers warning that income from lending will come under more pressure after a sudden reversal in expectations for interest rates globally.

Even as Switzerland’s largest bank on Tuesday posted its best quarterly result in almost a decade, lower net interest income already weighed on its key wealth management unit. The investment banking business, meanwhile, was dragged down by a continued slump in trading.

Net interest income “will come under pressure, not only because rates had a complete u-turn in respect of expectations,” Ermotti said in an interview with Bloomberg Television’s Manus Cranny in Zurich. In addition to the impact on U.S. bonds, “we also had headwinds from the euro and the Swiss franc rates. At the end of the day, if you sum it up, this is a huge change.”

With global growth slowing, central banks have been forced to reverse course after spending much of last year leaning toward tightening monetary policy. Federal Reserve Chairman Jerome Powell and his colleagues look primed to cut interest rates by a quarter percentage point later this month, and the European Central Bank is also on the verge of more stimulus.

That’s prompted Wall Street firms to signal that income from lending is likely to decline, should policy makers follow through. Bank of America Corp. and Wells Fargo & Co. indicated their biggest revenue source will decline in the second half, while JPMorgan Chase & Co. predicted a decrease from its record first half. How many times central banks cut rates this year will likely determine how steep the drops are.

The problem is particularly pronounced in Europe, where lenders have been punished by sub-zero interest rates for half a decade, while their U.S. peers enjoyed nine interest rate increases by the Federal Reserve since late 2015. Ermotti said such a policy was something very difficult to emerge from, leaving cost reductions as a key lever to improve earnings

“We have to now assume that rates will stay lower for a longer period than expected,” Ermotti said. “That’s the reason why we are very focused on mitigating actions in respect of what we do on our cost base and finding ways to execute on our other growth initiatives.”

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