UBS aims to expand its wealth management business in the U.S. through potential M&A activities within the next three to four years, Chair Colm Kelleher told the the Swiss NZZ newspaper Sunday, according to Reuters.

Since its acquisition of Credit Suisse last March, UBS has been criticized for its expanded balance sheet, which now exceeds $1.6 trillion — nearly twice the size of the Swiss economy. This substantial growth has prompted Swiss authorities to review the regulation of systemically important banks in the country.

Kelleher reiterated his thoughts that the Swiss Financial Market Supervisory Authority should be given the power to fine and dismiss senior executives if they are found to be incompetent – a move that would help to gear bankers’ compensation toward the long term, according to Bloomberg.

Despite these concerns, Kelleher resisted calls to impose higher capital requirements on UBS, arguing against the need for such measures.

“If you have too much capital, you penalize the shareholders, but also the customers because banking services become more expensive,” he told NZZ.

This week marks a year since UBS stepped in to rescue its rival Credit Suisse in a government-orchestrated $3.25 billion rescue plan, but the success of the bank merger will depend on whether the Swiss giant can turn around its wealth management business, especially in the U.S.

Over the past year, UBS has witnessed a growing presence of demanding shareholders, as investors pin their hopes on the bank's wealth division to drive a significant surge in its valuation. UBS has unveiled a new three-year strategy designed to achieve this objective.

The success of the wealth management business could have a profound impact on whether its head, Iqbal Khan, is chosen to replace CEO Sergio Ermotti, who has said he would step aside once the integration between UBS and Credit Suisse is complete.

Kelleher had said in November that he would like to have a shortlist of three strong internal candidates for the succession race within the next two years.

“[Khan] has a huge job ahead of him, and there is no guarantee he will succeed,” Johann Scholtz, a banking analyst at Morningstar, told the Financial Times. “If he can deliver, it will be a massive feather in his cap.”  

Khan needs to take care of some tasks, including retaining and regaining the confidence of clients who are skeptical of the Credit Suisse integration, holding onto its global position as the market leader in wealth management, and bolstering its U.S. operations to compete with bigger Wall Street players. 

Last quarter, the wealth management business generated $381 million of pretax profit — a 64% decline from the same period a year earlier, largely because of rising integration costs. However, profit in the Americas fell to $102 million in the last three months of 2023 — a plunge from $375 million a year earlier and $471 million for the same period in 2021, according to UBS earnings report released last month. 

The Swiss bank plans to raise the invested wealth management assets from $3.8 trillion to more than $5 trillion over the next five years, UBS said in its earnings report. It aims to attract $100 billion of net new assets every year to achieve that goal building to around $200 billion annually by 2028.

UBS is willing to lose some former Credit Suisse clients who are not paying the correct price for the products and services, Ermotti said.

“Too many client relationships are [based on single] products and not necessarily priced in the right way,” Ermotti said at a Morgan Stanley event last week. “So we need to either get those clients to do more business with us and justify that kind of loss-leading position, or we need to accept that maybe some assets will go somewhere else. For me, it’s all about quality.”

Though Credit Suisse left the North America wealth market in 2016, the Americas account for roughly half of UBS’s invested assets and nearly two-thirds of its advisers, according to the outlet.

UBS is far behind industry leaders Morgan Stanley, Bank of America and JPMorgan Chase in the U.S. wealth management business. Its Americas wealth business brought in $4 in profit for every $100 in revenue in the last quarter of 2023 – a number that is expected to rise to $10 to $15 by 2027 and reach around half the profit margins of its U.S. rivals.

“The US is a major drag for UBS, whereas the rest of the wealth business is more like Morgan Stanley in terms of pre-tax margin,” JPMorgan analyst Kian Abouhossein told the Financial Times.

“If it were not for the interest in the Credit Suisse integration and related costs at the full-year results, we would have been all over the US wealth management issues because profitability has gone backwards. There is quite a lot of hard work to be done,” Alastair Ryan, an analyst at Bank of America, told the publication. 

UBS is trying to replicate Morgan Stanley’s moves in the wealth business, according to people involved in the lender’s plans for its U.S. expansion, FT noted. The plan aims to maximize revenues from financial advisers and lend to ultra-rich clients — a business it specializes in outside North America.

However, UBS’s last attempt at getting into the U.S. wealth market failed when the bank terminated a $1.4 billion plan to fuse its business with Wealthfront, which would have added over $27 billion in assets under management to UBS’s portfolio and given the Swiss bank access to the robo-adviser’s 470,000 clients — many of whom are millennials and Gen Z. 

Hiring Morgan Stanley veterans Kelleher and Naureen Hassan had been seen as an important step toward making the U.S. a priority.

However, people who are familiar with Khan’s plans for the U.S. market told FT that he has a seven-year time frame in mind. The first three to four years will be spent improving the current business, with the second phase intended to build up scale with a couple of potential acquisitions.

“UBS is already one of the leaders in the attractive US wealth management market, and there are a number of levers that can and should be pulled to significantly raise UBS’s profitability there,” Cevian Capital Partner Gustav Moss told the Financial Times.