UBS Group AG is counting on higher interest rates and its diversified business model to support earnings later this year amid the ongoing market uncertainties that weighed on second-quarter performance.

"The second quarter was one of the most challenging periods for investors in the last 10 years," CEO Ralph Hamers said during an earnings presentation July 26. He cited rising inflation, tight labor markets, the Ukraine war and COVID-19 restrictions in Asia-Pacific as the key drivers of lower client sentiment and activity.

The tough market conditions resulted in weaker second-quarter revenues and profits for UBS' core wealth management and investment bank divisions and some of the earnings pressure will remain in the coming months, Hamers said.

He noted, however, that higher interest rates were already having a positive effect on earnings, and that diversification in both UBS' business and regional mix had helped the group offset some of the negative market effects in the second quarter. Those two factors were expected to continue supporting earnings in the second half of 2022.

Positive rate effects are coming from the policy tightening in the U.S., while, in Switzerland, UBS expects to see a stronger boost to net interest income, or NII, when the Swiss National Bank policy rate rises above zero, CFO Sarah Youngwood said during the presentation. In June, the SNB raised its policy rate to minus 0.25% for the first time in 15 years, and said further hikes would follow.

Revenue pressure

UBS booked a 2% year-over-year increase in group NII to $1.67 billion, with the wealth management unit booking a 24% year-over-year jump in NII. The strong NII growth, however, was not enough to offset the 17% drop in transaction-based income and the 6% decline in recurring net fee income, as overall wealth management revenues fell.

Second-quarter revenues in wealth management, which account for more than half of group total, declined 2% year over year to $4.68 billion.

Client deleveraging in Asia-Pacific continued in the second quarter, with a $3.3 billion net new loan decline booked in the period. This should slow down later this year when Chinese COVID-19 restrictions ease, Hamers said.

"I do expect that towards the end of the third quarter and certainly the fourth quarter that there will be much more optimistic news coming from China," he said. This would result in an uplift for business in China and APAC as a whole, the CEO noted.

Second-quarter group revenues edged up to $8.92 billion from roughly $8.90 billion a year ago. This was driven by the asset management division, where second-quarter revenues more than doubled year over year to $1.37 billion.

The investment bank unit booked the steepest revenue drop, of 14% to $2.1 billion, due to a 57% year-over-year slump in advisory and underwriting revenues. Trading revenues, meanwhile, rose 10% year over year as institutional clients took advantage of market volatility, Hamers noted.

Profit expectations missed

Second-quarter group net profit attributable to shareholders rose 5% year over year to $2.1 billion, but missed the $2.4 billion average consensus forecast of 19 analysts covering the bank. UBS shares were trading 6.96% below the prior-day close at CHF15.03 apiece at 1.30 p.m. Zurich time.

Second-quarter group pretax profit inched up to $2.62 billion from $2.59 billion a year ago, thanks solely to an $848 million gain from the sale of a minority stake in the Mitsubishi Corp.-UBS Realty Inc. joint venture to KKR & Co Inc.

The gain realized in the asset management division resulted in a 276% year-over-year pretax profit jump in that segment. Excluding that gain, the asset management division pretax profit was lower than a year ago.

Second-quarter pretax profit was weaker across all other divisions, with the investment bank again posting the biggest decline of 39% year over year, followed by the personal and corporate banking division with a 13% drop and the wealth management division with an 11% fall in pretax profit.