UBS is punishing its investment bankers for being worse than the rest

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The UBS Q4 results are out, and in terms of bonus expectations per capita the story is as clear as it’s negative – the investment bank has shown its lowest accrual for personnel costs in eight quarters (CHF537m, down 20% qoq and 18% yoy). This is despite reporting its highest headcount for eight quarters (5,205 full time equivalent employees, compared to 4,822 this time last year).  Revenues have disappointed, particularly in investment banking division (IBD) lines, and employees have clearly taken the pain rather than shareholders – the Q4 compensation ratio in the investment bank is only barely up on Q3 at 34.5% despite a 22% revenue fall, and will finish the year at 35.9%, a multi-year low.

Comparing the revenues to U.S. peers who have already reported, it’s not difficult to see what the problems were.  UBS actually had pretty strong numbers in fixed income currencies and commodities (FICC) sales and trading, where they bucked the trend to show 14% growth versus Q4 17, compared to an average fall of 18% at the U.S. banks.  They were toward the top of the pack in debt capital markets (DCM) too, with a quarterly revenue fall of 16% yoy only beaten by Citi and BoA in a quarter when Goldman and Morgan Stanley saw revenues crater.  But equities sales and trading revenues were weak, falling 13% on Q4 17 versus an average rise of 15% for US peers.  And then we get to what are usually UBS’ flagship IBD lines...

UBS cut professional staff at the start of the year and was sending stern memos to its senior M&A bankers in May, instructing them to have at least 300 face-to-face client meetings a year.  This hasn’t had the desired effect.  In a strong quarter for M&A revenues overall (the U.S. banks were up an average of 38% Q418 on Q417), UBS saw revenues fall by 20% on last year and halve compared to Q3 18. Equity capital markets were even worse; in a tougher quarter for the market, they came in way below the average with a fall of 47% on the same quarter last year.

Given that UBS began Q4 with the official departure of Andrea Orcel, it’s hard not to speculate that trouble at the top might have affected morale; at the very least, senior MDs might have felt under less pressure to make those meeting targets.  But the results presentation is pretty clear about the way things are going; several slides discuss “operating leverage” and “addressing market beta headwinds” and in context both those things mean passing on revenue weakness to the bonus pool.  In this bleak landscape, about the only good news is that UBS has clearly reversed the trend toward outsourcing; there are 4,741 more corporate centre jobs than there were last year (up 1,047 on Q3) as third party employees are brought back in-house.

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