UBS has just released its Q3 results. Ostensibly, they are very bad for its investment bank. After booking a CF1.6bn cost for litigation, “regulatory and similar matters”, UBS swung to a nearly CHF1.3bn pre-tax loss in its investment bank. But what else can we take away about employment and pay prospects at the bank?
Some recent recruits of senior bankers both in advisory functions and in areas such as credit and rates suggest that UBS isn’t retreating from bringing in talent, and headcount figures reflect this. As we point to below, employee numbers in the investment bank are not sliding as the significant redundancy announcements last year suggest they should. However, in the front office employee numbers are on the rise – it now has 5,285 investment bankers, a decrease from 5,318 people at this point last year, but an increase of 118 since the second quarter of 2014.
Investment bank headcount is flat overall on Q3 2013 at 11,881 employees. Only wealth management outside of the US (2%) and asset management (1%) have increased staff numbers since Q3 2013. However, investment bank headcount is actually up by 1% on the second quarter, probably because of the annual graduate intake. Overall headcount at the bank is down 1% 60,292.
The UK is still feeling the bulk of the cuts – headcount is now 5,471, down 4% on this time last year. UBS has just one more UK employee in Q3 compared to Q2, which considering that UBS typically brings in around 200-250 graduate recruits in its London investment bank, implies that headcount is still shrinking in the City.
UBS’s MENA headcount increased by 5% on the previous year – the largest increase of any region – but it still has just 166 people there. It also bolstered Asia Pacific headcount by 4%, and now has 7,405 people employed in the region.
So, if UBS isn’t cutting front office employees in big numbers, where are the costs being eliminated? The bank says that it will be cutting an additional CHF100m annually over the next three years. A large part of this will be an investment in simplifying its IT infrastructure and automating highly manual back office processes – reconciliation was cited as an example by CFO Tom Naratil – but inevitably headcount will be cut.
Responding to analyst questions, Naratil said: “We do not have headcount targets, but clearly headcount will be an element of this.” One way of cutting employee costs will be to shift them to lower cost destinations and UBS says it is looking at the “right mix of its global footprint” by moving people away from more expensive locations. It’s also merging teams that would have carried out different functions. Teams carrying out product control, transactional accounting and data analysis, for example, were merged into a “single unified middle office team”. It seems likely some people would have headed for the door as a result.
UBS set aside CHF942m for its employees during the third quarter, a 7% increase on the same point last year, but an 18% drop since the second quarter. So far for the year, personnel expenses are up slightly to CHF3.2bn, which equates to an average of CHF275k, an increase from an average of CHF265k at the same point last year. UBS booked CHF25m in restructuring costs, however, up from CHF6m in the prior quarter and says that staff costs decreased in the third quarter due to a “decrease in variable compensation”.
Nonetheless, costs in the investment bank look unsustainably high – its cost/income ratio was 166.2%, up from 85.3% at this point last year. Clearly, the litigation charges would have made for an unflattering comparison, though.
UBS’s M&A bankers had a positive Q3, increasing revenues by 32% to CHF149m on 2013, possibly reflecting the investment in hiring deal-makers throughout 2014. Similarly debt capital markets bankers, helped by a rise in leveraged finance income, increased revenues by 17% year on year to CHF216m. Equity capital market bankers, in line with the industry generally, increased revenues by 20% - undoubtedly positive but still a puny increase compared to the 66% rise at rival Credit Suisse.
The vast majority of investment banks’ FICC businesses saw significant year-on-year upticks in revenues in the third quarter. UBS, of course, retreated from large swathes of fixed income businesses as it restructured its investment bank last year and as a result it continues to lag – revenues were down 7% in its FX, rates and credit business year on year and 25% on the second quarter to CHF315m.
UBS is keen to point to the best Q3 performance for its equities business since 2010. This may be true, but it hasn’t been positive for everyone. A 2% uptick in revenues belies improved performance for its equity derivatives and financing divisions, but cash equity revenues have declined again.