The near-death and rebirth of UBS
UBS trades at 1.7 times book value while Barclays and Deutsche Bank trade at 0.7-0.8 times book value UBS RoE is 14 per cent while Barclays and Deutsche Bank can hardly manage five per cent.
Ubs under Marcel Ospel was a victim of the 2008-09 global crash that lost $50 billion in the subprime/credit debacle and later the victim of a billion-dollar losing bet by a rogue trade in its London proprietary trading desk. UBS decided to exit investment banking despite the loss of 10,000 jobs and revert to its pre-crisis roots as the world’s preeminent wealth manager. The capital markets have scaled down their perceptions of UBS banking risk once its five year credit default swaps trading at 40 basis points (down from 230 basis points in 2012), much lower than JPMorgan, Credit Suisse and Goldman Sachs. Chairman Axel Weber, a former Bundesbank president, and CEO Sergio Ermotti have successfully reinvented Switzerland’s global universal bank.
UBS trades at 1.7 times book value while Barclays and Deutsche Bank trade at 0.7-0.8 times book value UBS RoE is 14 per cent while Barclays and Deutsche Bank can hardly manage five per cent. UBS Basel Tier One equity is 13 per cent, giving it one of the biggest capital cushions in international banking. “Doing a UBS” has become a verb in banking boardrooms.
The crown jewel of UBS is its $2.2 trillion global banking and wealth management franchise. Weber and Ermotti have defined this as the core business of the bank after a strategic review in October 2012. The new mantra on the Bahnhofplatz is “wealth management is not what we do, it is what we are”.
UBS’s trading book grew seven times faster than its banking book under chairman Ospel and CEO Peter Wuffli in 2002-08, setting the stage for the most devastating loss in Swiss banking history. Ospel resigned after a series of catastrophic losses in the in house hedge fund Dillon Read, in mortgage-backed securities and credit derivatives, in the US client offshore banking business. CEO Oswald Grubel resigned after history’s biggest rogue trader Kweku Adoboli lost $2 billion in unauthorised trading in 2011. UBS’ reputation had sunk to new lows when Ermotti took over the bank as CEO.
The new CEO concluded that “being a one-stop-shop in global investment banking was a flawed choice for UBS”. Regulators were aghast at the systemic risk UBS posed for the Swiss confederation. Two-thirds of UBS’ capital base was tiled down in low return, complex, capital intensive structured finance and capital markets trading businesses. Management decided the future of the investment bank was to serve the private bank’s clients, not trying to out Goldman Goldman as a proprietary trader in the global capital markets.
Ermotti also stabilised wealth management, which had suffered 250 billion Swiss francs in client outflows in 2009-10. UBS rebuilt the investment culture in its core private bank, positioning it as a premium brand with a high capital cushion. After Ospel’s epic losses, UBS could no longer trade on its pre-crisis reputation as an ultra-safe Swiss bank. The scaling down of the risky investment bank led to client inflows worldwide and a 50 per cent rise in UBS share prices after announcement. In two years, after 2011 the UBS investment bank reduced its balance sheet assets by 400 billion Swiss francs. UBS Wealth management in the Americas (formerly Paine Webber) earned $1 billion in 2014 and $500 million in Asia.
UBS has reduced its non-core, stressed asset portfolio by 60 per cent since 2012. While the investment bank is again profitable, UBS paid $1.6 billion after its rates traders were engaged in Libor scandal.
The lessons of UBS’ near-death and rebirth have critical lessons for CEOs of other universal banks. Bank must define their businesses and their tolerance for risks. Bank must exit businesses that cannot meet cost of capital or expose shareholders to excessive risk. Banks must manage their businesses as proactively as portfolio managers manage equities books, ready to invest, harvest or exit them as the world changes.
