November 11, 2012 5:52 pm
UBS leads way in to wealth management
It is not every day that politicians laud corporate plans involving swingeing job cuts. But when Sergio Ermotti, UBS’s chief executive, unveiled his decision to focus on the bank’s wealth management franchise and shrink its investment banking arm, even Eveline Widmer-Schlumpf, Switzerland’s president, joined in the praise.
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Investors are pleased, too. Since news of the move broke two weeks ago, shares in Switzerland’s largest bank have rallied almost 20 per cent.
It is not hard to see why. Over the past five years, the investment bank has lurched from mishap to mishap while the wealth management industry was booming.
Yet for all the applause, there are notable risks. Mr Ermotti’s bold strategy involves not only the tricky task of winding down complex trading activities, but also relying more heavily on wealth management at a time when its margins have been eroded.
Since Mr Ermotti became chief executive – after the biggest unauthorised trading loss in British history toppled his predecessor, Oswald Grübel – it has been clear that UBS’s investment bank would not survive in its old incarnation. It racked up large losses, both during and after the financial crisis.
Equally fatally, a surge of new regulations and a slump in market activity has made many of its core activities uneconomical. Nonetheless, Mr Ermotti’s plan to run down a SFr140bn ($148bn) portfolio of non-core assets in full view of his rivals is not an exercise for the faint-hearted.
At first glance, therefore, focusing on wealth management looks the easier half of Mr Ermotti’s strategy. The wealth of rich individuals with more than $1m to invest is growing at about twice the rate of the global economy, according to analysts Mediobanca, and faster still in Asia where – as the second-biggest wealth manager by assets under management – UBS is well placed to profit.
Moreover, since wealth management does not require banks to hold much capital compared with riskier investment banking activities, it is well suited to the new regulatory climate.
“UBS has an enviable franchise in the ultra-high net worth business with both scale advantages and growth prospects,” says Kinner Lakhani, an analyst at Citi.
But there are serious challenges in wealth management too – not least those arising from the struggle between Switzerland and its neighbours over the Alpine state’s controversial bank secrecy laws.
Prosecutors in Mannheim, Germany last week said they were investigating whether UBS employees had helped clients in the country spirit money into Switzerland to evade taxes. In September, UBS’s Paris headquarters were raided by French police in a separate investigation into alleged tax evasion.
UBS is by no means alone in having to confront the ghosts of its past. Jürg Zeltner, head of UBS’s wealth management division, has said Switzerland’s SFr2.7tn offshore banking sector is likely to see outflows of “hundreds of billions” of francs as the Swiss government negotiates withholding tax agreements with its neighbours.
But the outflows – which in UBS’s case will continue for “quite a while yet”, and could reach SFr30bn, according to Mr Zeltner – will be enough to dampen growth in the bank’s European operations, even if they do not fully offset inflows elsewhere.
The problem for UBS is that the new money is primarily flowing into its emerging markets business, where margins are much lower than in Europe. “Before the crisis, they had gross margins of 125-150 basis points in Asia, now it is at 75 basis points,” says Christopher Wheeler, an analyst at Mediobanca.
This has left the bank well short of the gross margin target of 95-105 basis points espoused by Mr Ermotti. In the third quarter, the bank’s core wealth management division reached 89bp. The Americas franchise – which remains a work in progress following the Paine Webber acquisition 12 years ago – managed just 80bp.
The good news for UBS is that most analysts believe that the lower margins in Asia are a cyclical rather than a structural phenomenon. Once the economy picks up, predicts Mr Wheeler, profitability will follow suit.
“Asian clients are active traders, they like taking a few punts,” he says.
Other challenges, however, could prove structural. One question is whether a smaller UBS will be able to serve the varied demands of Asia’s nouveau riche, who include many entrepreneurs who look for both private and corporate services from the same bank.
This is one of the reasons why investment banks from Goldman Sachs to Barclays and Deutsche Bank have been seeking to strengthen their wealth management arms in the past few years, given that they already had the client base of entrepreneurs and hedge fund managers to feed into it.
A senior wealth manager at another large universal bank says: “[UBS’s] model is strategically flawed. I don’t believe you can run a wealth management business in 2020 without a strong investment bank because by far the largest growth driver will be entrepreneurial wealth.”
Other observers are less sceptical. Mr Lakhani says: “The areas of investment banking that [UBS has] stayed in neatly complement [its wealth management] business.”
Indeed, a smaller investment bank could actually help UBS to keep clients, reckons Mr Wheeler. “One of the biggest problems for UBS in wealth management has been all the negative headlines created by the mishaps at their investment bank.
That scares off wealthy clients like nothing else,” he says. “The prize that UBS is going for is undoubtedly worth the risks, particularly now that it has first-mover advantage.”
Pressure on tradition of bank secrecy intensifies
.Once a source of competitive advantage, Switzerland’s tradition of bank secrecy has become a quandary for the country’s private wealth managers.
With cash-strapped governments around the world desperate to maximise their tax receipts, pressure on Switzerland to ensure that foreign nationals do not use its banks to hide untaxed wealth has intensified.
Last year, the Alpine state signed bilateral tax deals with Britain, Austria and Germany that would allow those with undeclared assets in Switzerland to legitimise their holdings in exchange for submitting to a one-off penalty fee and a withholding tax. The British and Austrian deals are now in force. However, the German deal has yet to be ratified by the upper house of the country’s parliament. As things stand, there is a good chance that the government will lose a vote on the deal later this month.
If the agreement collapses, it is likely that German states will continue their controversial policy of acquiring CDs with data about German nationals with wealth in Swiss banks. The most recent victim of this policy was Julius Baer, which said in August that it had suffered a leak from its Zürich office.
The CD thefts have fed into investigations that led to raids on the homes of Credit Suisse clients in Germany in July. In the same month, French authorities raided the homes of UBS employees, before raiding the company’s Paris headquarters in September.
Meanwhile, the US is investigating 11 Swiss banks on suspicion of helping wealthy US citizens to evade taxes. The upshot of the regulatory pressure has been outflows from the offshore platforms of Swiss banks, and most observers think that the halcyon days of Swiss bank secrecy are over.
“Anyone who thinks this model will still work in 10 years’ time is deluding themselves,” says Mark Morris, an expert on international tax treaties.
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Copyright The Financial Times Limited 2012.
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