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UBS has plans for its investment bank after a dreadful quarter

UBS Q42017

Around this time last year, Andrea Orcel, chief executive of UBS’s investment bank, was talking about hiring. In an interview with Business Insider, he said the Swiss bank planned to add tens of bankers each year. These bankers would be hired by “word of mouth”, said Orcel, adding that they would be given “time.” – Time to, ” embed with the culture and the place,” and  then more “time with the client to get them to agree they can deliver for them.”

One year on, and it looks a bit like time is running out. In the fourth quarter, performance in the investment bank was miserable.

Take M&A, Orcel’s own specialty. Fourth quarter M&A revenues at the Swiss bank were down by 41% on 2016. At Bank of America, by comparison, they were up by 58% over the same period.

For all Orcel’s promises to hire senior investment bankers, UBS saw some significant exits from its global M&A team in 2017. Alison Harding-Jones, UBS’s former head of APAC M&A, left for Citi in June, as did the head of China investment banking. Glenn Rewick, the former head of EMEA healthcare M&A, left for Deutsche Bank in March.

Meanwhile, possibly because of Orcel’s “slowly-slowly” approach, UBS’s own M&A hires were thin on the ground and the bank made little headway in the M&A league tables. UBS continued to rank outside the top ten for U.S. M&A advice last year.  In APAC, it ranked sixth, down from 2nd in 2016. Only in EMEA was there an improvement: UBS finished the year in 10th place, up from 12th a year previously. In an apparent acknowledgement of its failings, the Swiss bank reorganized its investment banking division in November 2017.

Today’s results suggest that reorganization came too late. Nor do last year’s various fixed income hires from Goldman Sachs and elsewhere seem to have made much difference to the markets business. Fixed income revenues at UBS fell 37% year-on-year in the fourth quarter. Whilst this was better than Goldman Sachs and Morgan Stanley, it was worse than at other U.S. banks, for which Buckingham Research puts the median decline at 11%.

Combined with a one-off CHF79m loss on a loan likely to made to Steinhoff, poor performance contributed to an 84% decline in the profitability of UBS’s investment bank in the fourth quarter. This was accompanied by a collapse in the return on attributed equity to just 2%.

For the year as a whole, compensation per head at UBS’s investment bank was reduced from CHF651 to CHF612k.

UBS has plans to make amends. In the call accompanying today’s results, UBS CEO Sergio Ermotti promised to cut spending on compliance and controls and to invest in “digitalization.” In the investment bank, UBS plans to invest in content and distribution (suggesting it’s doubling down on MiFID II by focusing on research), in electronic execution and in platform consolidation. It also wants to, “leverage China and the U.S.”

For 2018, UBS aspires to a cost income ratio of between 70% and 80% in its investment bank and to a return on attributed equity of over 15%. For 2017 as a whole, costs accounted for 83% of its revenues and the return on attributed equity was 13.4%.

Employees at UBS’s investment bank need to hope the fourth quarter was a one-off. Either way, it seems there are some small cuts to come.


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