Nice problems to have
UBS’s Sergio Ermotti, the longest-serving chief executive in the history of the firm, hates short-termism.
“It’s very difficult to have one eye on the short term and one eye on the long term,” he told Euromoney as part of our 50th anniversary coverage in June 2019.
His opinion is unlikely to be swayed too much by a poor quarter. But UBS has been facing headwinds for longer than that. Market conditions have been particularly tough for UBS over the last 12 months.
Record low volatility hits every investment bank, with only the US outperforming. The best-performing asset class has been fixed income. If your business is weighted towards Asia and Europe, and you are stronger in equities, as UBS is, your performance suffers.
Low volatility also hits wealth managers, and UBS is the biggest wealth manager of them all. Lack of client activity hurts revenues.
So Kirt Gardner, CFO of UBS, is relatively pleased with the bank’s performance.
“A 13% return on CET1 [common equity tier-1] makes us among the best in class in Europe and is good given the market conditions we have faced,” he says. “We’ve seen inflows of $55 billion over the first nine months of the year, with a 10.6% rise in Asia. We’re benefitting from a flight to quality among wealth clients in uncertain times.”
That relative performance is at last being recognized in UBS’s share price, which almost halved from early 2018 to the middle of 2019. Over the last three months the share price has ticked upwards, from a low of SFr10 ($10.14) to around SFr12 at year end. But Gardner is adamant it still does not reflect the strength of UBS’s business.
“We can’t be happy with a price to book value of 0.9 times,” he says. “We’re hopefully moving in the right direction. Our total shareholder returns are around 7% and we’re paying an attractive cash dividend. We’ve also completed SFr800 million in share buybacks.”
The markets can expect UBS to continue this trend in 2020.
Talk to UBS executives and the new buzzword is ‘partnerships’. Where UBS does not have sufficient local scale in important markets, it is looking to partner with bigger domestic banks to provide investment banking and wealth management services.
Two were announced in 2019 – with Sumitomo Mitsui (SMBC) in Japan and Banco do Brasil in Brazil. Such partnerships are notoriously hard to make work, but Gardner is confident these will.
“Our SMBC partnership gives us a great opportunity to cross sell,” he says. “It is the largest trust player in Japan, and the combination with our wealth platform could be very powerful. There’s a big flow of Japanese wealth into international markets, and no foreign firm has really been able to capture that yet. Banco do Brasil has an amazing corporate balance sheet. We’re stronger on investment banking and advisory.”
UBS is exploring other partnership deals in bigger global markets, and we can expect further announcements in 2020.
The relatively poor performance of the investment bank has prompted a reaction. The strong equities division has been combined with the weaker fixed income operations on one overall platform, where UBS hopes it can better leverage its capable technology. On the banking side, UBS continues to adopt a ‘global boutique’ approach, where capital allocation is key.
One area that UBS hopes will play to its strengths in is the growth of private capital markets.
“Private capital is an exciting opportunity for us,” says Gardner. “Clients want to be creative in this low-to-negative rate environment. They’re looking for yield. The combination of our wealth management and investment banking platforms gives us a great chance to provide it to them.”
While UBS’s wealth management business remains an undisputed leader, a tacit admission that it could do better came in the form of Iqbal Khan in 2019, hired from arch-rival Credit Suisse. Khan joined as global co-head of the division, replacing the departing Martin Blessing.
“We’re lending more to our UHNW [ultra-high net-worth] clients and offering them more opportunities through our combined wealth and investment banking capabilities,” says Gardner.
UBS is also successfully building the number of clients covered by its global family office.
The remaining co-head of wealth, Tom Naratil, is charged with boosting UBS’s presence in US wealth management, where it is now the only meaningful foreign player. Progress has been slower than hoped, although it is a long-term plan and Gardner sees positive signs.
“We’re the only global wealth manager in the US and we’re focused on closing the gap to the domestic leaders,” he says. “Meanwhile our partnership with Broadridge has given us best-in-class technology capabilities in the US.”
For all the positives, UBS faces a problem. It is getting inflows through a flight to quality, but it is harder than ever to generate a good return on those deposits, especially in a core Swiss business hampered by long-term negative rates.
It’s an irony not lost on Gardner, who says: “It is a nice problem to have. We’re privileged to have the portfolio we have. We’re very optimistic over the medium term.”