Sideways: Can Q1 results staunch flow from UBS?
Strong first-quarter results at UBS might have come just in time to prevent the implosion of its bid to regain a spot at the top table of investment banking.
Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks
There has been turmoil at all levels of the investment bank since the start of the year, with senior management upheaval, mid-level staff defections and widespread unhappiness with bonus payments.
Respectable sales and trading results for the first quarter and apparent compromises over both dealing capacity and future compensation give some hope that investment bank chief executive Carsten Kengeter can stop the rot.
The details of the trading performance also offer some insight into the likely reasons for the upheaval in the investment bank’s management this year. When securities head Neal Shear and co-head of FICC Dimitrios Psyllidis left the bank some observers assumed they had been outmanoeuvred by equities co-head Yassine Bouhara and FICC co-head Rajeev Misra, both Deutsche Bank veterans. According to this theory the two Deutsche Bank cuckoos had managed to push their rivals out of the UBS nest by demonstrating superior political infighting skills.
That might have been a factor but their case was also backed by performance. Equities revenues in the first quarter were up 4% to a healthy SFr1.31 billion ($1.5 billion), split roughly equally between cash and equity derivatives, the area where Bouhara made his name. And although FICC revenues were down 17% from the same period last year, the headline revenue total of SFr1.8 billion was strong and was driven by a rise in credit revenues to SFr988 million from SFr744 million. This was attributable to gains in Misra’s specialist sector of structured credit and in flow trading. Macro fixed income – Psyllidis’s bailiwick – fell from SFr922 million to SFr556 million, as rates trading suffered and foreign exchange revenues dipped.
The extent of the upheaval when Kengeter moved to a new management structure of four global co-heads of securities in March was obvious to outsiders. Neal Shear was booking meetings with prospective clients until a few days before he disappeared off the UBS grid and it took the bank some time to admit that he had actually been pushed out.
Mid-level departures also started to come thick and fast, threatening the broader UBS franchise, including areas where it retained scale from before the financial crisis, such as equity capital markets and prime broking.
Global head of capital markets Matthew Koder left UBS to run Bank of America Merrill Lynch’s corporate and investment banking operation in Asia, in a move that was particularly troubling for UBS as it came in the wake of a spate of earlier defections from its leading Asian ECM business.
BAML also raided UBS for prime brokerage staff. Stuart Hendel was poached as global head of prime brokerage for BAML in March, followed soon afterwards by the hiring from UBS of Charlotte Burkeman as co-head of broking for EMEA. When UBS Asia-Pacific prime-broking head David Gray left the bank in late April the firm’s bench for servicing hedge funds began to look distinctly weak.
There were some indications in the first-quarter earnings announcement from UBS that Kengeter had obtained permission from group chief executive Ossie Grübel to take steps to stop the departure of key employees.
One was the announcement that risk-weighted assets would stay at end of first quarter levels for the rest of the year. That will allow credit traders and other fixed-income staff to avoid cutting positions. A second pointer came in a warning that compensation costs might rise because of competition for talent. There is certainly nothing that improves team morale in banking more than a guaranteed compensation rise obtained by a threat to leave for a rival firm.