Five years after reversing UBS' strategy, CEO Sergio Ermotti is pining for recognition from investors for the successful restructuring. He has another five years to gain it. finews.asia explains how.
This month marks five years since UBS decided to leave large parts of fixed income, let go thousands of bankers and traders, and focus on lucrative and low-risk business with the world's wealthy.
The path chosen by chairman Axel Weber and CEO Sergio Ermotti was the culmination of five solid years of scandals, including rigging benchmark rates, a $2 billion rogue trader, and helping tax dodgers cheat on their taxes.
After the initial shock, the duo's daring plan was almost immediately applauded by the public and by investors: the Swiss bank's stock rose from roughly 12.50 Swiss francs in autumn of that year to as much as 22.50 francs in 2015. But the shares dropped by as much as half, to 11.60 francs, in the next year, and since then have been unable to escape a trading band between 13 and 17 francs.
The sideways trading pattern clearly rankles Ermotti, who must feel he is not being given credit for revamping UBS. The bank wants to present itself as a secure and innovative wealth manager, but investors aren't having it – even five years after the turnaround.
According to Weber and Ermotti, the two plan to remain in their respective seats for another five years – plenty of time to get UBS into the shape it aimed for when it set out in 2012. How? finews.asia identifies nine open issues.
1. Scandal Clean-Up: Not So Fast
UBS boss Sergio Ermotti would have you believe differently, but the Swiss bank hasn't put aside all its past scandals just yet. He still has to bury a mortgage scandal that cost rivals Credit Suisse and Deutsche Bank dearly. UBS has set aside $1.4 billion for that scandal alone, while another in France over tax and wealthy clients looms.
Puerto Rico, where UBS is under fire over how bond sales, is another sore spot. So far, the bank has paid claims of roughly $1 billion, with no end in sight. UBS can't credibly call itself a solid boring cash machine until the scandals have settled.
2. Capital: When's Enough?
The bank is a model within Europe, where rivals are struggling to shore up capital to meet international Basel III requirements. An 80 basis point drop last quarter in its capital ratio, which has risen steadily since the aftermath of the financial crisis, raised eyebrows with investors.
The fall was explained by regulatory adjustments, but the episode shows how reliant UBS is to show an extremely strong capital ratio consistently.
3. Private Bank Feeling Poorly
Largely overlooked because the unit still poured 582 million Swiss francs of pre-tax profit into overall results, but UBS’ private bank is not well. Clearly, it will miss the mid-term margin target of more than 95 basis points – the closest it has gotten was nearly two years ago, with 87 bp. Net new money is also a worry: UBS has missed its goal of at least 3 percent growth five times in the last two years, including two quarters of outright net withdrawals.
Part of the problem is an industry one – negative interest rates, jittery clients who are still too petrified of losing money as they did in 2008-09 to trust financial markets again, the end of banking secrecy and a new, more demanding (less profitable) client profile, and of course more, costlier regulation.
The second part of the problem is an UBS one: the Swiss bank has simply failed to come up with many original ideas to kickstart revenue. Commendable as they are, efforts to listen to client needs more selflessly and woo wealthy women have a Johnny-come-lately feel to them. UBS’ overarching response to a rapidly-changing industry still appears to be to cut costs to shore up profits, and investors should expect more from the world’s largest wealth manager. Longer-term this will serve neither the bank nor its leadership very well.
4. Interest Rates – Floodgates Opening?
UBS' believes its private bank will enjoy tremendous automatic «upside» as soon as interest rates exit negative territory and begin normalizing. Several years into an unprecedented series of monetary easing measures, it has become clear that Europe in particular will not find its way out of the expansive policies anytime soon. While U.S. central bankers have begun gently lifting rates, this has been slower in coming than expected.
In UBS' home market, the Swiss National Bank and the franc remain hamstrung by wider Europe, which has shown little inclination to reverse course. In short, the floodgates aren't opening anytime soon.
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