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Momentum: Oswald Grübel addresses the shareholders meeting in April |
In rushing out the early announcement last month of a first-quarter pre-tax profit of SFr2.5 billion ($2.3 billion), UBS chief executive Oswald Grübel clearly hoped to persuade fractious shareholders gathering for the bank’s annual meeting in mid-April that his turnaround of UBS is well under way. The consensus among many analysts covering the bank had been that it would report just under SFr2 billion for the first quarter, so this came as a welcome sign of gathering momentum.Efforts to rebuild the fixed-income and credit-trading businesses are clearly bearing fruit. On March 30, the bank responded to press reports that FICC would bring in $2.3 billion of revenue as being “slightly higher” than its own forecast as the quarter drew to a close. Official figures were due to be released on May 4, after Euromoney went to press.
In an interview published in February, Grübel admitted to Euromoney that “the fixed-income business was more or less destroyed last year”. But it was already rebuilding fast, with 350 new hires in FICC by the start of this year, including 165 at managing director or executive director level. Prominent among these was Deutsche Bank veteran Rajeev Misra, who arrived as global head of credit in July 2009 and was also named joint global head of FICC at the start of this year alongside Dimitrios Psyllidis, who is global head of macro.
These two work with Jeffrey Mayer, executive chairman of FICC and head of complex structured solutions, who joined in 2008 after 19 years at Bear Stearns where he was instrumental in building the fixed-income franchise and headed MBS/ABS.
War stories
He and Misra must have some great war stories to share. Misra, who boasts a third title at UBS as joint head of emerging markets, is a derivatives whiz who ran credit at Deutsche when it was one of the most innovative firms in structured credit trading. But the German bank’s appetite for such risk diminished at the end of 2008 when it tripped up over the basis risk on apparently matching hedge positions between cash and derivatives instruments in the same names.
Market sources suggest that the new FICC group at UBS is somewhere between a half to two-thirds of the way through building out what might eventually become a flow-monster trading operation designed to cover enough real-money, leveraged and central bank accounts to let it find customers on either side of different trading views on rates and credit products.
This is a swift turnaround for UBS’s investment bank and one that is needed as the hefty revenues and profits being drawn in by competitors such as JPMorgan and Goldman Sachs attest. These strong survivors have thrived as former competitors such as UBS struggled last year. David Viniar, CFO of Goldman Sachs, ascribed the firm’s $7.5 billion of FICC revenue for the first quarter of 2010 to “high market share and strong client activity, despite lower volatility”.
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net private-client outflows in Q1 2010, considerably better than the SFr20bln analysts expected |
UBS management and shareholders are understandably keen to win back a larger slice of this succulent revenue pie.Grübel is desperate to win over another audience as well. He explained to Euromoney in advance of last quarter’s results that the outflows of private-client money that bedevilled UBS through the crisis from 2007 to 2009 will only slow when the bank returns to profitability. Grübel’s view is that wealthy clients don’t like being customers of a bank that isn’t making a profit (see Private banking: Oswald Grübel claims the tide is turning for UBS Euromoney February 2010).
For now, while the outflows from the private bank have slowed from their peak last year, it’s difficult to present continuing client defections as good news. UBS is trying though. The bank suffered SFr33 billion of net outflows from its core wealth management business in the final quarter of 2009, a number boosted by a one-off tax amnesty for Italians. For the first quarter of 2010 analysts had feared continuing net outflows of about SFr20 billion. So they were pleased to see the actual number come in at just SFr8 billion.
“This is obviously good news for the stock – the market’s key concern has been outflows,” says Fiona Swaffield, banks analyst at Execution Noble.
Waiting for time
If Grübel is right, that rate will decline further as long as the bank maintains a sustained profit recovery. Time will tell if the bank’s wealthy private clients are reassured by the ability of UBS’s fixed-income traders to wring profits from the volatility around European government bonds amid the awkward progress of the Greek bailout.
US clients don’t seem terribly impressed just yet. In UBS’s large US private banking business the reduction in client outflows across the first quarter of this year was narrower. They withdrew a net SFr7 billion, down from SFr11 billion in the final quarter of 2009. Some analysts had hoped that outflows would have slowed to $4 billion following the arrival of Merrill veteran Robert McCann to run the business.
Small shareholders, still reeling from the losses UBS suffered, aren’t delighted either. In a consultative vote at the annual meeting on April 14, shareholders only narrowly ratified the 2009 compensation report, which passed with just 54.72% of the vote. They also discharged the members of the board of directors and the group executive board for 2008 (77.37%) and 2009 (85.13%) but not for 2007 (52.75% voted against).
Last December, the board of UBS announced that, after careful consideration, it would not initiate legal action against former executives over sub-prime losses and the former cross-border private client business. It wants to draw a line and move on, while Grübel’s gruff assessment is that there is no law against stupidity.
That mood of forgiveness is slow to filter down to small shareholders. It might yet take a few more quarters of bond-trading success and an end to net outflows to cheer them up.
