The Business Times
Tuesday, Nov 13, 2012
Our investment bank is being rightsized, says UBS Chairman Axel Weber during our conversation in late September. "That's the word I would use."
Just over a month later, UBS - in which Singapore's sovereign wealth fund GIC is the single largest shareholder - announced the biggest shake up of any investment bank since the global financial crisis.
Having already cut more than 3,500 jobs over the last three years, the bank axed another 10,000 on Oct 30, 16 per cent of its total workforce of 64,000 - most of them from its investment banking operations.
The move may well be a precursor to a global "rightsizing" of the entire investment banking industry.
UBS had been badly hit by the crisis, during which it lost some 39 billion Swiss francs - the biggest loss in Swiss corporate history. Most of the losses stemmed from its investment banking operations.
Formerly an economics professor and then head of Germany's central bank, the Bundesbank, for seven years till April 2011, Mr Weber has a reputation for prudence, independent-mindedness and taking tough decisions.
As a member of the European Central Bank's Governing Council, he consistently opposed the purchases of troubled countries' sovereign bonds by the ECB.
"Large asset purchase programmes are very close to the grey area of monetary financing, particularly if they are selective purchases," he explains.
"There is no pan-European debt instrument like the Treasury bond. So selective purchases of problem countries' assets might actually act as a substitute rather than a complement to doing the right long-term reforms. That was my concern."
He remains unfazed that his was often not the majority view in the Council. "If you're the only person who has a different view, that doesn't exclude the possibility that you're right,'' he says.
After taking over as Chairman of UBS in May 2012, Mr Weber and the bank's relatively new CEO, Sergio Ermotti (who was appointed in November 2011) lost little time in taking tough decisions to refocus the 158-year-old institution, which is the world's second largest manager of private wealth.
Across a conference table at UBS's 50th floor offices at One Raffles Quay, Mr Weber explains the rationale.
"UBS has a substantially changed strategy compared to five years ago," he says. "Among its objectives then was to be one of the world's top three investment banks. That's not our objective any more. Our objective is to have a wealth management franchise globally that is second to none, complemented by our asset management expertise and a client focused investment bank. At the same time, we are the largest universal bank in Switzerland, a dominant player in the home market. That's the core of what UBS is about and we want to increase our footprint in these areas."
The scaling back of UBS's investment banking operations to some extent represents the undoing of past excesses. In the go-go decade leading up to the global crisis of 2008, securities trading by investment banks - often for their own account - was rampant, and UBS enthusiastically joined the party.
Adjustment was front-loaded
"Over 2000-07, the banking book did not grow a lot, but the trading book grew by a factor of seven,'' says Mr Weber. "That trading book growth has now been reversed. As it reverses, the profitability of the trading book is coming down. Every bank needs a strategy to deal with that global trend. We front-loaded our adjustment way ahead of anyone else."
As part of its adjustment, Mr Weber says UBS is exiting from proprietary trading of equities as well as of complex structured products - such as those based on complicated derivatives - the demand for which has, in any case, fallen. Other banks such as Citigroup and JP Morgan have also cut back on their investment banking operations, but none has been as aggressive in doing so as UBS.
Governance is another area where Mr Weber wants UBS to be "top of the class". "Many investment banks are going through major changes not only in their balance sheet, but also in the way their governance is organised,'' he points out.
"That depends on a number of industry trends, but by and large you see a global trend towards remuneration in investment banks coming down - largely because the contribution of investment banking to the banking industry is declining.''
But Mr Weber stresses that UBS will retain, and even grow, those parts of its investment bank that support client needs. "You cannot go to a corner solution where you focus exclusively on wealth management and not have the services, the expertise and presence in the markets that you develop through investment banking and market making,'' he points out.
"We want to do a lot more advisory business - for example, helping our clients to issue debt and equity instruments related to corporates and advising them on mergers and acquisitions. Those are functions that investment banks originally performed, focusing on the real economy and helping corporates to invest. All those people who are calling for investment banks to disappear don't seem to understand this: some part of what investment banks do is actually not to the detriment, but to the benefit, of the real economy and to investment and growth. And that is something that is in greater demand in a growing region like Asia than in regions that are either in recession or are stagnating, like Europe.''
He also points out that investment banking can synergise with wealth management, and UBS plans to tap into that mutual synergy. "For example, many of our high net worth clients are founders or owners of their companies.
"When it comes to generational change, very often their children do not want to take over their companies. So these clients look to our investment banking expertise to help them professionalise their managements when they step out. We can do that with our advisory services, by using our balance sheet for an IPO, or helping them raise debt in the markets. The flow from that business would go into the investment bank, but the deal is originated in wealth management. The flow can work in the other direction too," he explains. "Very often if the company that we work with is sold and the proceeds go to the owners, they want to put the money into wealth management, largely because they have a trusted relationship with us in the investment bank.
So the cross-fertilisation between wealth management, asset management and investment banking is a core part of what UBS is about. And again, it's particularly strong in the Asian region where the number of new millionaires and billionaires emerging is larger than in Europe.''
Another high priority for UBS, according to Mr Weber, is to be so well capitalised as to put the issue beyond doubt. "Given that taxpayers were very angry about having to bail out banks, in both the US and Europe, it is in the best interest of banks themselves to have a standalone ability to absorb risk and to deal with market volatility by having sufficient capital and long-term liquidity planning," he says, adding that this is especially the case for banks active in the wealth management business. "In retail banking, deposit guarantee schemes may enable you to withstand volatility in markets. But in wealth management, your clients will want you to have high capital ratios, because they entrust sums of money with you that are much higher than in retail."
Setting sights on Asia
UBS has moved aggressively to strengthen its capital position; its common equity tier-1 capital ratio stands at 9.3 per cent, already approaching the Swiss minimum regulatory requirement of 10 per cent by 2018 - the deadline for the implementation of Basel 3, the new global regulatory standard on capital adequacy which is scheduled to be implemented from 2013 onwards.
With Europe caught in a protracted economic slowdown and the US economy also operating below potential, Asia with its faster growing economies and swelling ranks of super-rich, is critical for UBS.
The most recent milestone for the bank in the region was the establishment in July of UBS China, headquartered in Beijing. "We are the first universal bank that has a universal banking licence for the Chinese home market," says Mr Weber.
The bank offers fixed income, currencies and commodities-related business, as well as wealth management to its mainland clients. "That shows our commitment to the region, to be present, offering specialised services at a high level of expertise where local competitors do not yet have the sophistication to offer similar services."
But UBS's commitment to Asia is not new, he adds. "We've been in Singapore since 1970, so it was a very early commitment. We have more than 2,000 people here; we have twice as many people in Singapore as we have in Germany. So you can see how important Singapore is to us. And it isn't because of tax issues, it's purely because this is the best financial centre in the region, jointly with Hong Kong. We do wealth management, asset management and investment banking here."
He believes that especially given its Swiss roots, UBS has a natural affinity for Singapore. "When I come to Singapore I am always reminded about stability, long-term orientation and prudent management - qualities that are also characteristic of our home market. In Switzerland, the debt to GDP ratio is 37 per cent. It is an Asian type of number. The unemployment rate is 2.5 per cent, nowhere near the 25 per cent in Spain or even the 7 per cent in Germany, and the inflation rate is slightly negative at the moment. Switzerland has a very stable environment, which is why there's this affinity."
Mr Weber cautions, however that Asia cannot but feel some of the ripple effects from Europe's economic problems, through the channels of trade, investment and lending.
"Something like 20-30 per cent of Asia's exports go to Europe. In some countries like Singapore, exports relative to GDP is more than 100 per cent. It will be difficult for countries that have specialised export structures to replace demand from mature economies like the EU with demand from domestic sources."
As for the investment channel, he points out some unwinding of European investments in Asia is inevitable. "As Europe's banks face capital challenges with declines in the asset values from their peripheral bond holdings, they will need to raise capital to absorb losses," he notes.
"To raise capital ratios, they will have to reduce their balance sheets, because capital is not easily available for banks in the markets. So they have to do their capital ratio improvement through asset reduction and deleveraging. This deleveraging process will take place in assets that they can sell at close to notional values and those are largely assets in the US and Asia.
So European financial institutions are deleveraging their investments in Asia. There are also cutbacks in funding investment projects and providing credit in Asia. So liquidity lines granted by European banks are being withdrawn as banks try to insulate their balance sheets and move to the higher capital requirements being phased in."
Add it all up, and there is a risk that European woes will aggravate Asia's slowdown, which is happening anyway, for domestic reasons.
But for the medium term, Mr Weber remains optimistic - most of all, for emerging markets and Asia, but also for the US economy, which he feels will further improve after the Presidential election.
He is less optimistic about his native Europe, however. "It has its problems and they cannot be fixed with short-term money,'' he suggests. "They have to be fixed with long-term political solutions and those are hard to achieve; the political costs have to be paid up front, but the benefits will only materialise down the road. It's unpopular and therefore won't happen soon.
"But in the long term, I am optimistic even about Europe,'' he says. "They will eventually be able to put their problems behind them.''
Chairman, UBS AG
Born March 8 1957, Kusel Germany
1982: Diplom (Master's degree) in Economics from the University of Konstanz
1987: PhD in Economics, University of Siegen
1994-98: Professor of Economic Theory, University of Bonn
1998-2001: Director of the Center for Financial Studies in Frankfurt/Main; Professor of Monetary Economics at Johann Wolfgang Goethe-University, Frankfurt
2001-2004: Professor of International Economics and Director, Center for Financial Research at the University of Cologne
2002-04: Member, German Council of Economic Experts
April 2004-April 2011: President, German Bundesbank and member, Governing Council of European Central Bank; concurrently, Director, Bank for International Settlements and Governor for Germany, International Monetary Fund; member, G-7 and G-20 Ministers and Governors
2011-2012: Visiting Professor, Booth School of Business, University of Chicago
May 2012: Appointed Chairman, UBS AG
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