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Does UBS need a second home market?

In its home market, UBS has aroused plenty of popular antipathy as an embarrassment to the country for its frequent stumbles in the past five years. But as a business, it is doing reasonably well.

In its home market, all the divisions of UBS – wealth management, retail banking, corporate banking, investment banking and asset management – report to one man: Lukas Gäwhiler, chief executive of UBS Switzerland, who joined in 2010 from Credit Suisse where he had been chief credit officer.

It’s not a structure that sits easily with the UBS group reporting lines or affords the Swiss domestic business as an entirety much visibility. But insiders say that the business has performed well, despite huge margin compression since 2008, from around 150 basis points to 50bp. While other geographies in the business have struggled, profits derived from or booked in Switzerland are understood to have contributed close to 60% of UBS’s bottom line in recent years.

Lukas Gäwhiler, chief executive of UBS Switzerland
Lukas Gäwhiler, chief executive of UBS Switzerland

Gäwhiler paints an optimistic picture for the future. "If you believe that interest rates will rise from here at some point, then there is no better call option on that than the Swiss business of UBS, where a 250bp rise in rates would probably add SFr1 billion on our pre-tax profit."

The "One Switzerland" approach has reaped benefits that no doubt CEO Sergio Ermotti would like to see across the group. Fully 20% of revenues in Switzerland result from referrals across business lines, so from retail banking into the wealth management business and from wealth management into the corporate banking book, which has grown particularly strongly in the past three years.

UBS employs about 22,000 people in Switzerland – it is the country’s biggest non-public-sector employer – but only around one in 20 of those are investment bankers. This could be a model for the capital-lite investment-banking model that UBS is now set to pursue globally.

But could it also be a testing ground for some of the tough discussions to come? In Switzerland, UBS has a very large credit book – close to SFr200 billion – of which well over half is mortgages on which it needs to write 20-year swaps. Although the investment bank won’t be doing that globally anymore, should it have the capacity to do so in Switzerland or risk – perish the thought – having to go to a rival such as Credit Suisse to execute the swap?

That capability to do long-dated swaps is core to maintaining the retail banking business that is in turn an important feeder to the wealth management business. And that will give the senior management and board of UBS much to ponder in the years ahead. Once European banking systems stabilize, the pent-up demand to consolidate will become apparent. UBS has strong capital and earnings potential. This bank that has stumbled so many times since 2008 might well be one of the consolidators, even though its senior management must know that neither shareholders nor regulators want to hear about this right now.

What key lesson does Gäwhiler draw for the group from his seat in Switzerland? "Today, the various businesses in our Swiss home market account for more than half of UBS’s pre-tax profit. In an ideal earnings mix, Switzerland’s profit contribution to UBS Group would be around one-third, with continued growth in absolute terms. In order to get there we have to ask ourselves, how can we ensure we continue to grow our international wealth management franchise? Clearly, a client-centric investment bank and a sizeable asset management business will help us achieve this by fully utilizing our capabilities globally. However, looking to the future, at some stage we may have to think about the need to choose a second home market/region."

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