At the behest of the state, UBS has been transformed from a reliable, income-generating institution with a high return on capital into a bizarre casino where bets are being placed on illusory success in the coming years, finews.com editor Claude Baumann observes.
How quickly things change. Exactly a year ago, then UBS CEO Ralph Hamers presented the bank's best first-quarter results in 15 years. The figures were so good the freshly printed financial targets were rapidly consigned to the recycling bin and Hamers was on the verge of transforming the bank into the leading «ecosystem for financial matters».
Despite all his accomplishments, Hamers is no longer in office, and UBS is in danger of losing what it achieved in recent years within a very short time. To be sure, this is not through any fault of its own but comes because of state intervention. Last month, Switzerland's largest bank was forced by the Swiss government to take over its troubled arch-rival Credit Suisse to prevent its collapse.
High-Risk Bet
On the surface, and in the jargon of federal officials, the view is the merger can be seen as a solidarity measure benefitting the national economy by preventing the Swiss banking system from collapsing or at least from suffering massive damage.
Upon closer inspection, it turns out to be a high-risk bet at the expense of a private company that came out of the financial crisis of 2008 as a much stronger institution, thanks to a well-thought-out restructuring and achieved new, global success. That success contributed significantly to the reputation of the Swiss financial industry.
Since March 19, Switzerland has decided to put a successful model at risk, which was thrown into sharp relief in the first quarter results of the two major Swiss banks in several respects.
1. Not all Money Flows to UBS
Credit Suisse continued to hemorrhage client funds in the first three months of the year to the tune of 60 billion Swiss francs ($67.5 billion). Not all of that went to UBS, which reported $28 billion of inflows.
In light of the amount leaving Credit Suisse, that's not so much for UBS. Private banks are rubbing their hands because many Credit Suisse customers are beating down their doors. To be sure, UBS will be able to expand its position as the largest global asset manager, but not in the sense that 1 + 1 = 2.
2. Sluggish Clients, Volatile Money
Enormous asset piles are currently being moved between different banks. But customers are behaving conservatively, leaving their money in cash or parking it in money market funds for the short term, securing greater flexibility to move funds around as needed. Nothing is decided as far as the final choice of a financial institution is concerned, as customers examine their options.
That makes it very difficult for banks to increase fee income, especially since the clientele is currently also making only very limited use of Lombard loans and refraining from other transactions. There can hardly be any talk of a «big push».
3. Cautious Earnings Outlook
UBS CEO Sergio Ermotti was cautious in his outlook on Tuesday, which is hardly surprising given passive clients, but also against the backdrop of the lull in investment banking where the M&A advisory business is very weak at the moment.
The macroeconomic outlook is also far from rosy, given inflation, the threat of recession, and geopolitical conflicts. As it has done before, UBS will have to get back to baking smaller rolls for the foreseeable future as the success of recent years is ebbing.
4. Lower Interest Margin
As can be seen in the quarterly results, the gloomy mood is reflected in the interest margin, which has fallen at UBS. The effect of the interest rate turnaround initiated by the central banks has not yet manifested itself to a notable extent.
In addition, UBS's costs in the first quarter rose to $7.2 billion, exceeding the forecast of $6.5 billion. This is mainly because Hamers significantly expanded the workforce and invested in digitalization offensives and the resetting of the corporate culture to an Agile model. If earnings do not increase significantly under these conditions, the bottom line will be less money, putting the business model in jeopardy.
5. Absorbed Management Capacities
The very fact that the successful UBS ship is threatened with being blown off course should be reason enough for top management to stand on the bridge and prudently adjust its course to take into account the changed conditions.
The state-ordered takeover of Credit Suisse threatens to divert considerable management capacity into integration work, which will severely absorb operating resources. These are not the best conditions for defending UBS's claim to global leadership.
6. Credit Suisse's Legal Legacy
UBS is indeed getting enormous government support for the takeover and integration of Credit Suisse. How it will manage a large number of ongoing legal cases in which Credit Suisse has become embroiled in the past is another unknown likely to weigh heavily on UBS in the coming years, which is likely to also play in the media. After all, clients don't want banks that are constantly in the headlines.
When historians one day look back on this time, they might be amazed at the recklessness with which the authorities in Bern sacrificed a successful model in favor of a bank that could not survive.
