UBS's GROUP CHIEF executive officer, Peter Wuffli, cuts a somewhat unlikely figure for a global head of one of the world's leading investment banks. Softly spoken and self-effacing, he might seem more at home pampering wealthy private clients in his native Switzerland than getting involved upfront in one of the world's most cut-throat businesses.
Appearances can be deceptive. Behind the mild manners and urbane exterior lies a conviction and determination that has steered UBS through difficult markets, tricky acquisitions and vicious competition to begrudging acceptance from its mainly US peer group. Long dismissed by its competitors as a private bank pretending to be an investment bank, in May, UBS went some way towards dispelling this notion when it announced record results for the first quarter to March 31 2004.
Significantly, the bulk of the group's income growth came from its investment banking activities. Net income from fixed income, equities and foreign exchange trading activities was up 88%, 35% and 29% respectively over the fourth quarter in 2003. Operating profit from the group's investment banking division increased by 115% to SFr1.67 billion ($1.3 billion) from the first quarter in 2003. Although wealth management, the traditional engine of UBS's growth, also enjoyed a strong performance, up one-third over the same period, investment banking operating profit was larger than private banking and business banking combined.
A category of one
Wuffli is certain what lies behind the group's success to date. "It's a combination of things: it's part of the very clear strategy we've been pursuing for the past 10 years, first with SBC and now as UBS," he says. "First of all, our businesses outside of Switzerland are wealth management, global asset management and investment banking: no retail branches, no commercial banking, no insurance. Second, the culture we have in the bank embraces people of different backgrounds and benefits from the diversity of their experience. Look at the group management team: 40% Swiss, 30% American, 20% British and we still have staff from all our predecessor firms: SBC, O'Connor, Brinson, Phillips & Drew, PaineWebber, SG Warburg, UBS. Third, our leadership has been very consistent. It's truly a partnership and we have been spared the autocratic management styles that govern some other banks."
Although a collegiate and multinational management team probably makes a lot of sense, it is not altogether certain that the business mix does. UBS operates four key business groups: wealth management and business banking, global asset management, investment banking and wealth management USA. In Switzerland, UBS is also a full retail and commercial bank, but has made a conscious decision not to pursue these activities abroad. This omission means that it sits in a space by itself as neither a global financial supermarket, such as Citigroup, JPMorgan Chase or, arguably, HSBC, nor a specialist investment banking group such as Goldman Sachs, Morgan Stanley or Merrill Lynch. It also means that UBS not only forgoes business that it could otherwise garner by extending its balance sheet but also means that it is never likely to occupy the top banking slots globally. It is a position that Wuffli concedes, but also vehemently defends.
"We are in a category of our own," he says, "we are the world's largest wealth and asset manager with over $1.7 trillion client assets and we operate the world's premier equity research and distribution business. The unique distribution strength helps overcome some drawbacks in terms of scale. But scale is not everything. We won't win every deal but we're convinced that we can be competitive and we feel that there's room for more than one model in the industry.
"We don't have an international commercial banking business: we don't have people offering loans or trade finance. Our business is not purely balance sheet-driven. Strategically, we've always felt that if you want to build an investment bank, you have to do it based on advising clients and not just on providing access to a balance sheet. What does a huge P&L, of itself give you other than an opportunity to take more risks?"
Wuffli and his colleagues have clearly done a lot of hard thinking about their business structure and, in particular, the bank's commitment to investment banking. They remain convinced of the strategy.
"In 1998, after the Long Term Capital Management collapse, we had a very deep soul-searching exercise when everyone – inside and outside [the bank] – questioned our commitment to investment banking. But we came out of that introspective time even more committed to investment banking: it is part of UBS. If you want to be in investment banking you have to be totally committed: there's no such thing as half pregnant."
UBS has clearly invested serious money into investment banking, which has been built around several key acquisitions. Most crucial, according to Wuffli, was the move into mainstream US investment banking, the linchpin for which was the acquisition of PaineWebber in 2000.
"Look at the world map," he says. "The US has 60% of the fee pool, so you've got to have a significant presence. In Asia and Europe we were very strong. It was clear that we had to build a credible US franchise. How do you do that? We decided that if we could acquire distribution scale, we could build on it. That's why the acquisition of PaineWebber was essential to our investment banking business. We'd have never had the 750 top investment bankers we now have in the US without PaineWebber. Last year, beyond any doubt, with 5% market share in the US, we entered the top tier. We have the resources. We are in a position to compete."
Done merging
He speaks not just with conviction but also with visible relief. UBS's investment banking operation has been built on a series of significant acquisitions dating as far back as 1986. In fact, with several seminal deals, including the acquisition of SG Warburg in 1995, Dillon Read in 1997, the merger of Union Bank of Switzerland and SBC to form UBS in 1998, and the 2000 Paine Webber deal, it is perhaps not surprising that Wuffli and his colleagues believe the main deals are behind them.