HUW JENKINS IS shaken but not stirred after some of the toughest months in his career. The chief executive of UBS’s investment banking division has ridden through plenty of storms before, both at his bank and in the markets. But rarely can he and his fellow senior directors at the Swiss bank have endured such a torrid few months as they did this summer.
First, in May, the bank announced the closure of its hedge fund, Dillon Read Capital Management (DRCM), which was run by Jenkins’ predecessor, John Costas, after just two years of operation. It was an embarrassing admission of defeat by UBS after the fund raked up reported losses of SFr150 million ($124 million) in the first quarter.
Then, in July, group CEO Peter Wuffli lost his job, apparently after being held responsible for the DRCM debacle. Wuffli’s was the most high profile of a number of senior departures (both voluntary and involuntary) in recent months. These include Hartmuth Jung, vice-chairman of global investment banking; Jeff Raich, co-global head of M&A; Ken Moelis, a veteran dealmaker; Jeff McDermot, co-head of investment banking; and Simon Bunce, global head of fixed income.
Finally, in August, the bank issued a profits warning for the second half of this year following the collapse of the US sub-prime market.
All this bad news has led some analysts and investors to question the value of the investment bank to the group and to ask whether the time is ripe to separate the business from the asset management division and the private bank.
During UBS’s second-quarter results presentation in August, one analyst said of the investment bank that "clearly the market expects very little in terms of return" and pressed for clarification on its long-term future.
Marcel Rohner, Wuffli’s successor, stood firm. He told the audience that he was "extremely pleased" with the investment bank’s performance, emphasizing its talent pool and highlighting its resilience in the face of the departures.
Jenkins, whose standing in the markets remains undiminished, also stresses the positives. He points out, for example, that the investment bank has had its two best ever quarters as measured by pre-tax profits. He does, however, say, in a classic piece of British understatement, that "there has been a lot going on".
He declines to comment on DRCM beyond saying that the exercise of shutting the fund and reintegrating 122 of its traders has taken up money but also a more important commodity to him – time. "We are reintegrating Dillon Read’s balance sheet and financing back into the bank and that takes up a lot of time," says Jenkins.
He describes the process as being the equivalent of establishing administrative structures for a new operation in a new country.
He declines, however, to say whether all the losses have been reported or if there is more bad news to come. Some market analysts reckon the losses could eventually total as much as $2 billion.
Nor will he get dragged into a discussion about what went wrong at the fund: was it simply a case of bad bets made in the US sub-prime market or was there an inherent conflict in a model that had traders managing both proprietary and third-party client money? Although Jenkins will not say, the answer is probably both.
What Jenkins will discuss is an area of business that is far removed from the DRCM fiasco and is a silver lining amid all the turmoil – its emerging markets franchise. This business, he says, is one of the three most important areas of growth for the bank – the others being US investment banking and credit.
"The latter two are market-share strategies whereas emerging markets is a fundamental market growth strategy," he says. "We think, as has been demonstrated through this cycle, that the balance sheets of such countries as China, Russia and Brazil are so much better than they have ever been that there has been a fundamental shift in their stability and growth dynamics."
UBS has always had pockets of success in the emerging markets, most notably in Russia, where it formed a joint venture with local player Brunswick Securities in 1997 (the bank subsequently bought out Brunswick’s share in the business in 2004 to make the outfit a wholly owned subsidiary).
The Swiss firm has also had a strong presence in the Middle East for 40 years and has done well in certain markets and in certain products, most notably in Asia-Pacific and in equities.
Over the past two years, the bank has ramped up its emerging markets presence largely on the back of two big-money, potentially transformative deals: the acquisition of Brazilian brokerage and asset manager Banco Pactual and a 20% investment in China’s Beijing Securities, which gives the Swiss firm management control. It is one of only two agreements between a foreign investment bank and a domestic securities firm in the People’s Republic. The other venture is Goldman Sachs’s tie-up with Gao Hua.
Could the emerging markets be crucial in unlocking value from the investment bank? "I think it’s a very important part of it," says Jenkins.
He adds: "A lot of people have made the comment that UBS doesn’t get full recognition for the value of its investment bank, which is a different way of phrasing [the point]. That is a function of some of the investments we have made impacting our cost-income ratio [at 70.8% in the second quarter, up from 69.5% in the same period a year earlier]. And we expect that we will see that improve as we demonstrate that our investments have been sound.
"In my opinion, based on the metrics I am looking at, the investments we have made in the emerging markets have been much better than we expected. So we are in a very strong position to demonstrate that the investment bank really can add significant value and that’s going to be clearly shown in terms of our emerging markets strategy."