Road to nowhere

UBS and Barclays face long road to nowhere

Banking is a low-growth industry with little going for it - as second-quarter earnings from UBS and Barclays show. The two banks beat analyst forecasts for net profit, excluding a charge Barclays took for selling its French retail business. Yet each suffered significant absolute drops from a year ago and UBS has ditched short-term guidance on profitability. The outlook makes it hard to see where an improvement in the pair's valuation could come from.

Consider Barclays, whose home UK market has voted to quit the European Union. The three months to June contained just five days after the referendum result, making it hard to say definitively how much the bank might suffer. The hope for boss Jes Staley is hat growth in Barclays' next largest market - the United States - alleviates any pain.
 
UBS boss Sergio Ermotti would also benefit from a brisk US economy as well as a pick-up in Asia, which has historically accounted for as much as a fifth of revenue. His problem is that rich clients are keeping their wealth in cash and refusing to trade, limiting how much UBS can earn. Its wealth management businesses' quarterly gross margins - which measure revenue as a proportion of assets under management - fell to their lowest levels since 2014. They would have been worse without the hike in US interest rates last year, which juiced net interest income.

Following post-Brexit share price falls, Barclays trades at only half its 289 pence tangible book value per share. For devotees of the Gordon Growth Model beloved of bank analysts, this is consistent with a 7 per cent return on equity, an 11 per cent cost of equity and medium-term earnings growth of 3 per cent. If Brexit means Barclays can't get its returns to snap up into double digits, then its shares won't budge. If Asian economic growth fails to rebound, then the same dynamics will apply to UBS, which at least trades around book value.

The market could easily be wrong. But banks have stickier costs than they used to as a result of new regulations. So the Swiss group's warning that difficult market conditions may persist is salutary. Both Barclays and UBS' returns could well be on a long road to nowhere.