Why Rohner left UBS – his last interview as UBS CEO
Euromoney was the last publication to carry an in-depth interview with Marcel Rohner before he resigned as CEO of UBS at the end of February. In the interview he details the challenges that will now face his successor, Ossie Grübel.
UPDATE: Why Rohner left UBS
26 February 2009
Senior UBS bankers past and present, as well as leading investors in the Swiss bank, discuss the challenges that continue to face UBS as it tries to return to profitability. Read our February cover story for unique insight into where UBS goes next.
Marcel Rohner was not able to see through to the end the task of rehabilitating UBS. In our Febraury cover story, Euromoney details the issues that can now be seen to have made his departure inevitable.
Q How much has the UBS brand been tarnished by what has happened over the past 18 months?
There are UBS-specific issues and industry-wide issues involved. We started the process of writing down the value of assets earlier than most because of particular exposures. At that point we were a bit of an outlier.
Now it is clear that the issues are much broader than UBS, and that puts our situation in perspective for a lot of people.
But clearly it is true that as a wealth manager, an investment bank and an asset manager, the results that we have produced have undermined our reputation.
Q: What have you done to repair that reputation, and do you think you have done enough?
The simple answer is that we will not have done enough until we return to profitability. That is our number one objective.
We need to continue to take steps to signal both internally and externally that we have learnt lessons from our past mistakes and are implementing measures. These include our strategic repositioning, the resizing of our business and changing the compensation structure for our top executives.
Ultimately, it will be profitability and stability that restore trust.
Q: UBS once had a particular reputation for prudence and careful risk management. That has been destroyed. Can you repair it?
We have reported extensively on what went wrong. We are the only institution that has been so transparent. We have shown the outside world that we have not shut our eyes to the mistakes we made and the lessons we learned.
So there are a number of things that we addressed: risk concentration, cross-subsidization, funding the balance sheet with excess cashflow. These are now recognized as issues for the industry as a whole but I think investors and clients will see that at UBS we dealt with them early and thoroughly.
Q: When do you expect to return to profitability?
As we have said before, return to profitability in 2009 is our most important priority.
Q: Will you ever return to the same profit levels as you posted before the crash?
That will take several years.
Q: Because of both the changes to the industry and the reduction in size of UBS by shrinking your balance sheet?
Within our core activities, across private wealth management, investment banking and asset management, we have good, stable underlying businesses with reliable cashflows and low volatility.
Q: So investment banking is still important to you?
The whole environment for investment banking and capital markets is very depressed. But in areas such as equity, foreign exchange, short-term rates, options and government bonds we have very client-driven flow businesses that produce dependable profits and that we can build on.
Q: But the primary driver of your return to profitability will be wealth management?
Despite starting with lower asset bases and recent outflows that we have suffered, wealth management and asset management are stable businesses with profitability potential. There is a much more fundamental turnaround in the investment bank industry.
Q: Is there any way you could have avoided going to the Swiss government for support? And was it embarrassing to have to do so?
The last thing you want to do is manage a bank through difficult situations like these based on emotions such as pride or embarrassment.
It is important to remember that in an industry such as banking, where confidence is so fundamental to how it operates, you have to manage dynamically and with foresight. If there is a chance that things will get worse, you have to act early. And when you look at some of the numbers that the industry disclosed in the latter part of 2008, October was clearly the right moment to address these issues. Every institution would prefer to manage its situation on its own, but if you need to take a drastic step to protect a bank, then that is what has to be done.
Q: Once you made that decision to go to the government, was the aim to do as much as possible and clear the decks?
We aimed to make it as comprehensive as possible, and those assets that we removed were core to the problem. On the other hand we knew that whatever we did would not make us risk-free.
The equity capital we raised at the same time was an important statement. It was designed to make the removal of the assets, and the equity we injected into the fund with the state, neutral to positive for the capital of the bank.
Q: You’re comfortable with your capital, you made tough decisions early, you’re better positioned to ride out the global recession than many competitors. Are you communicating this well enough to the market?
We’re very conscious about that. But we cannot pre-announce a return to profitability and then find that because of external factors we did not deliver. We would lose credibility.
Q: Private banking faces its own challenges. Does the model of product distribution still work?
We’ve always built our model based on being a top adviser, not on being the distribution arm of a product manufacturer. We believe in open architecture.
But in the current downturn virtually every strategy has suffered, and that obviously creates disappointment among clients. Now more than ever we need to spend time with them, assessing their situations and reviewing their investment strategies. That will be even more important in the future than offering products.
Q: Haven’t structured products been the main driver of profitability?
Private wealth management is an extremely long-term business and the thing that really counts is the retention of long-term client relationships. Diversification will remain important and wealth protection strategies are of increasing importance. A short-term focus on profitability is not the right approach.
The growth of our asset base and of our product offering is not the first objective but is a consequence of our advisory business.
Q: You’ve lost a lot of clients from the private bank. Your competitors are rubbing their hands with glee at the prospect of more. Can you get the clients back?
The first thing you have to recognize is that we have lost a lot more assets than we have lost clients. Understandably, in these difficult times, clients have been diversifying their assets.
But we are fighting as hard as we can to win back every client we have lost. We are convinced that the measures we have taken will bring assets back to UBS.
Q: But this diversification trend will continue. And as the incumbent leading manager of assets, will UBS not continue to lose assets, if not clients?
This is why we have seen the outflows. But we now have a balance sheet that is easier to explain and tighter capital ratios. We are restoring confidence, and once that has happened the clients, and their assets, will be back. We have deep, deep institutional experience here.
Q: Does the same apply in growth markets such as Asia and the Middle East, where you don’t have those previous relationships?
We’re confident that our brand and our service will allow us to grow in all markets. We’ve been around for 150 years and had issues before.
Q: Given your reputational issues in the US, can UBS still hope to be a major player there?
It represents one-third of the world’s wealth pool, but it has always been a very competitive market. What we are seeing now, with all the bank mergers, is that the landscape is changing. I’ve always said we can increase our profitability in the US. It is not yet of the scale we want it to be, but we will continue to work towards that goal.
Q: In hindsight, did you try to grow the global wealth business too quickly?
There are always three ways to grow: get more business with existing clients; get new clients; or make your existing services more efficient. We’ll continue to follow that strategy in businesses we believe to be core.
Q: Does the present global destruction of wealth mean you have to revise growth targets?
Look back a few years ago to the period 2000 to 2003 when the internet bubble burst. We had huge falls in the equity markets – more than 60%. We have not seen that yet. But our wealth management business continued to grow strongly at that time.
You’ve gone from the world’s biggest manager of assets to the world’s 10th biggest in the space of 12 months. Will you ever be number one again?
Well we’re not an ETF or index manager. Our objective is to achieve long-term, sustainable growth that outperforms other asset managers. If the result of that is we become the largest asset manager again, then great. But it is not in and of itself an objective.
Q: A lot of banking groups have reconsidered their ownership and control of institutional fund management businesses. Will you do the same?
Our asset management business is very profitable and has many characteristics that outperform many of its peers. And our growth in assets under management from institutions rather than private money is growing. So it is very important to us.
There are many different views on the best model for an asset manager; and of course there are, for example, fiduciary responsibilities that make it hard to realize cost synergies. But for us, it is a core part of our long-term growth alongside our private-client business.
Almost all of our businesses have, in some report or another, been disposed of.
Q: So have you ever considered selling the investment bank?
We’ve always said that the investment bank is a part of our portfolio. The real issue is not one of separation but value creation.
Q: So by making investment banking a completely separate operating unit you are saying to that business: ‘Stand on your own two feet and show us what you are worth’?
It is very important that the business can demonstrate that it can be profitable in economic terms in its own right. We can only then get the benefits of the synergies between our businesses: they are largely synergies of revenues, through product flow and execution, rather than cost. Now we have transparency of value creation in all of our business units.
Many people who have worked here say the combination of investment bank and wealth manager has never worked as well as one might expect.
Well, we would never channel practically all of the transaction execution of SFr2 trillion [$1.75 trillion] of assets through one investment bank if it were not ours. And about 60% of the structured products we sell are in-house. So by definition it works. But our new structure means the value creation of each business is properly recognized.
Q: But the investment bank will never operate in as many areas as before?
We have exited a few businesses. Commodities, for example, is a good business but we were always relatively small and we didn’t have a real chance to be a major player. Real estate securitization is clearly a market that has been badly hit.
But we have some very well functioning businesses: cash equities, prime services, derivatives, foreign exchange and short-term rates, for example.
These are substantial, flow-driven areas that we have a lot of experience in. We have demonstrated that we know how to run them. And they have a good risk/return profile.
These are the pillars on which we will build our investment bank in the future.
Q: Fixed income was the core of the losses. Can UBS continue to have a franchise in fixed income?
The businesses we have lost were not franchise businesses. But we also have good divisions in fixed income.
Q: Can the new-look investment bank ever be as profitable as some of its competitors?
We want superior, long-term sustainable growth. Will we be the most profitable? Maybe not in overall terms, but we hope we can be in terms of reward for risk.
Q: Investment banking is a people business. How will you hold on to the most talented individuals if the risks they can take, and therefore the rewards they can achieve, are constrained?
We have very talented people and they will have great opportunities going forward. We believe we have a unique proposition that will keep them here.
The investment banking industry has changed. We’re not going back to 2006 – not next year, not in five years, perhaps not ever.
It is difficult to predict now how the industry will evolve. But we have a number of promising cards in our hand. We do not need to be pessimistic because of mistakes we made in the past.
Q: If you and [chairman Peter] Kurer were the right people to take UBS through a restructuring, do you have the right management team to take the new UBS forward?
Of course I think we do. But there will always be renewals of management teams. Perhaps at UBS there was too little of that in the past, and this could have contributed to the mistakes we made. We are sensitive to this going forward.
One criticism is that top UBS managers are too specialized: they have experience of their own business, but little idea about the business as a whole.
This is always a challenging issue. But it is a legitimate question, and we can certainly do better in terms of building people’s experience within asset management, private banking, or investment banking. If we have more renewal, then this will happen more naturally.
But it is harder to switch people between businesses. Running wealth management is very different to running investment banking. Historically there was sometimes a big difference in compensation between the two, although that is changing now. But detailed knowledge of a business is and will remain a top priority.