Macaskill on markets: Question marks loom over Ermotti’s call to old friend Orcel
UBS chief executive Sergio Ermotti has taken a giant step back in the latest attempt to revive the ailing firm by hiring his former Merrill Lynch colleague Andrea Orcel as co-head of investment banking.
If Ermotti had wanted to demonstrate that he has learned nothing from the upheaval in the industry since 2008, he could not have done better than to poach and promote a corporate finance executive who was given the unlikely title of the George Clooney of banking in a gushing front-page news article after his appointment.
Orcel certainly has an enviable talent for self-promotion, but the adulatory profiles that followed his defection from Bank of America Merrill Lynch to UBS failed to explain how his supposed former triumphs are expected to translate into future performance.
Orcel is best known for advising on European banking industry M&A deals, ranging from the merger of Banco Bilbao Vizcaya and Argentaria to the biggest deal of his career in the form of the purchase of ABN Amro by RBS, Fortis and Santander.
The latter deal was one of the worst takeovers in history in terms of overpayment and value destruction; RBS is still 82% owned by the UK state after having been driven to failure by its purchase of much of ABN.
Orcel should not shoulder all the blame for the disastrous 2007 acquisition of ABN, of course. But his role in enabling and encouraging RBS’s Fred Goodwin and the other bidders to keep throwing more chips on the table does not speak well for the quality of Orcel’s advice to financial industry clients, although Santander, which has reaped huge benefits from picking up ABN’s Brazilian assets, might beg to differ.
Orcel also became a poster boy for the excesses of investment banking compensation practices when he collected a 2008 bonus of $33.8 million, despite the fact that his employer Merrill Lynch effectively collapsed towards the end of the year and was forced into a sale to Bank of America that was brokered by US regulators.
Orcel’s bonus for 2008 was based on his reported generation of $550 million of fees. Setting aside whether or not he should have been paid a bonus comparable to his 2007 total in a year when his employer failed, and giving Orcel the benefit of the doubt on his responsibility for the $550 million fee total, it is worth considering if he is likely to add comparable value in the coming years.
Cold, rational analysis can provide only one answer: no.
The market for big cross-border banking industry takeovers is effectively closed for the foreseeable future. Regulators clearly signalled that they do not want the biggest international banks to get any bigger by the way they framed the recently announced capital charges for systemically important financial institutions.
That leaves fundraising for financial clients in the form of advisory work and equity capital market mandates as the main area where Orcel can be expected to add value. It is extremely difficult to see how UBS can generate worthwhile revenue in this field at the expense of better-established equity houses such as Goldman Sachs and Morgan Stanley at a time when financially stronger banks including JPMorgan are also looking to extend market share.
UBS was not in the top 10 ECM players by revenue in North America last year and its number six ranking and 4% market share in M&A translates to only $368 million of revenue, according to Dealogic. Its situation was no better in Europe, where core investment banking margins are slightly worse than in the US. UBS managed a number eight ranking in European ECM fees in 2011, but that brought in a paltry $91 million and the same number eight slot in European M&A revenue generated $274 million. Asia, where UBS has traditionally had a strong overall equity franchise, did not provide much comfort on the advisory and ECM front. Chinese banks are increasingly cornering capital market flows in the region; ECM revenue for UBS in Asia ex-Japan with its number six ranking last year was $128.86 million, while a number eight slot in M&A resulted in just $25.52 million of fees.
How might Orcel start to move the dial on advisory and origination revenues that are low on an absolute and relative basis in a sector where consensus forecasts point to a further fall in overall earnings during 2012?
One way would be to haul in clients personally and monetize the relationships on which he has built his career. There were reports soon after his departure from BAML, presumably fostered by Orcel or his proxies, that clients such as UniCredit and Santander will soon shift business to UBS. That would be a welcome boost, of course, but the business could shift again equally quickly if these financial sector clients were to get better offers from other investment banks. Personal contacts count for more in corporate finance than in pure sales and trading, but the only tested way to increase revenue in investment banking is by assuming greater risk.
And that is where Ermotti’s decision to hire his old Merrill colleague as co-head of the investment bank at UBS sends a confusing and potentially troubling signal.
Orcel’s last big deal at BAML was securing the lead mandate on UniCredit’s €7.5 billion rights issue in January. The deal went off successfully in the end, but only after the reversal of a sudden collapse of roughly 50% in UniCredit’s share price that had raised the prospect of the underwriters being stuck with losses on their holdings.
This did nothing to affect Orcel’s reputation as a banker who is happy to raise the stakes on risky trades. His appointment sends a strange message to staff members at the UBS investment bank who are undergoing cost-cutting in the wake of poor performance in 2011 that was compounded by a rogue-trading loss in London of SFr1.8 billion ($2 billion).
Towards the end of 2011 and again at the release of full-year results on March 15, Ermotti presented what appeared to be a logical if uninspiring plan to refashion the investment bank at UBS. A detailed path was outlined towards risk-weighted asset reduction by exiting select complex business lines and scaling back in areas such as flow rates and credit, and synthetic equity. Maintaining fixed-income revenues at an annual level above $5 billion equivalent and equities revenues around $4 billion while scaling back risk would have been hard enough. Introducing a corporate finance executive whose advisory and ECM area of expertise accounts for little more than $1 billion revenue as co-head of the investment bank is a bizarre move that will do nothing to instil confidence in the latest of many attempts to revive the fortunes of UBS.
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