UBS reported a fourth quarter 2012 loss of SFr1.9 billion, but as this was towards the bottom end of the SFr2 billion to SFR2.25 billion range it had been guiding analysts to late last year, no one should be surprised.
The good news for shareholders is that the group’s fully loaded Basel III common equity tier 1 (CET1) capital ratio has risen from 9.3% at the end of the third quarter to 9.8%, as its balance sheet shrank by SFr107 billion. The bank is proposing an increased dividend for 2012 and plans to buy back expensive debt.
UBS is moving from the era of capital accumulation to capital return.
Its confidence in doing so is enhanced by evidence of a shift in power between shareholders and employees in a weak labour market for bankers. Chairman Axel Weber has been reported as the architect of a plan to pay part of senior bankers’ compensation in a new loss-absorbing high-trigger deferred capital instrument, under which those employees would forfeit deferred compensation balances if a 7% Basel III CET1 ratio level is breached or if a non-viability event occurs.
If investors won’t buy CoCos, UBS seems intent on stuffing them to employees. Its 2012 bonus pool already shrank to the lowest level since the start of the financial crisis.
That might dilute any lingering pain for shareholders after UBS confirmed that large fourth-quarter 2012 loss owing to Libor-related fines and restructuring costs. During the three months in which it absorbed those hits, investors bid up the bank’s shares by almost 30%. They love the idea of the new UBS group with the scandal-plagued and patchily performing investment bank that once dominated shrunk to a mere fraction of group equity and UBS shrinking back to its core strength of private banking.
However, are investors getting ahead of themselves, rewarding UBS now for the execution of a plan still in its infancy and for which there are no obvious precedents?
“Scaling down an investment bank, particularly its derivatives positions, is a bit like shutting down a nuclear reactor,” says Kiri Vijayarajah, banks analyst at Barclays. “That’s something you do only very slowly and by keeping all your best and highest-paid engineers to do it. But you’re no longer connected to the grid, so you’re not earning much in the process.”
While equity capital allocated to the investment bank may well shrink, much of that capital has simply moved and now supports assets in the corporate centre being wound down by traders led by Carsten Kengeter, formerly head of the investment bank and a FICC specialist. Some traders might hope to return one day to their old hunting ground, but speculation is growing that a second phase of restructuring might lie ahead and the rump fixed-income and DCM businesses might not last.
|Sergio Ermotti, chief executive of UBS|
It is the private bankers now running the show who want to keep parts of the investment bank operating and even have their own ideas how to grow it.
As Jürg Zeltner, chief executive of UBS Wealth Management, seeks to ramp up his business in high-growth emerging markets beyond Asia, where UBS is already strong, he tells Euromoney that he sees a role for the investment bank in Mexico and Brazil. “These are important markets where we have suffered a setback since we sold Pactual,” he says. “You can’t win the business of wealthy individuals in Latin American without strong local know-how and access to their capital markets, just as you can’t in Indonesia, in Taiwan or in any other emerging market.”
Investors don’t want to hear this kind of talk. They just want to see rapid progress in the next couple of quarters with disposals of non-core risk-weighted assets and a quick return to healthy dividends and share buy-backs.
Ermotti knows the clock is ticking. He says: “I always said that this is a three-year journey and we are at the beginning of the second year. We will have to demonstrate on a quarterly basis that we are delivering on our plans.”
However, looking beyond the next few quarters, big strategic questions remain for UBS. The majority of its earnings will derive from the commercial banking, retail banking, and wealth and asset management businesses in Switzerland. That’s quite a concentration. In an ideal world, its home market might comprise one-third of earnings.
Lukas Gähwiler, chief executive of UBS Switzerland, says: “At some stage, we may have to think about the need to choose a second home market/region.”