Esteves details his plans for Pactual
Slowly but surely UBS is dismantling the emerging markets business that it has built over the past few years. First, in January, it sold its 1.33% stake in Bank of China for a reported profit of about $350 million after a three-year lock-up period expired. Then, last month, it sold its Brazilian business, Pactual, back to its original owners for $2.5 billion.
While the first could be charitably characterized as an opportunistic trade, the latter is anything but. The bank describes its sale of Pactual – which it bought only three years ago – as “consistent with UBS’s policy to continue to reduce its risk profile, strengthen its balance sheet and sharpen its business focus”. Tear away the spin and the bank is saying that it is desperate for capital and can no longer provide the level of investment needed to continue supporting the business. The bank’s desperation is evident from its admission that it expects the sale to result in a small loss. When UBS bought Pactual from Andre Esteves in May 2006 it paid six times book value. It is selling it back to him at barely a premium to book value.
Although UBS shareholders have the right to feel aggrieved that they got mugged at the top of a bull market, the bank’s new management of Ossie Grübel and Kaspar Villiger had little choice in selling Pactual. UBS continues to bleed heavily because of the financial crisis. In mid-April, the bank pre-announced that it had made a loss of nearly $1.7 billion for the first quarter – a loss that lowered the bank’s tier 1 capital ratio by about 1%. The disposal of Pactual rebalances that fall to a certain degree by boosting UBS’s tier 1 capital ratio by 0.6%. But it leaves the Swiss bank precisely nowhere in Latin America.
The sale raises questions about the prospects for the bank’s other key emerging markets assets, especially in China (where it is one of the few foreign banks to have a local securities business), Russia and the Middle East. With investment banking falling down the pecking order of the group’s priorities will the management decide to exit these markets too? A tougher regulatory environment will raise the cost of supporting these international businesses substantially.
And what of the other banks whose plight is as desperate as UBS’s? How long before we see them disposing of their previously prized emerging markets assets? Royal Bank of Scotland, for example, is selling its Asian franchise. Others are bound to follow. The global deleveraging process has barely begun.
