UBS was supposed to release its second quarter results tomorrow. Following a spurious weekend report in a Swiss newspaper about its second quarter profits, it’s released them today instead. As befits Deutsche Bank analysts’ overall favourite bank in Europe, it’s looking pretty good.
Here’s why you might want to work for the house of Sergio in the second half of 2015.
1. It’s not in the middle of a big strategic shift
While rival European banks are all over the place, UBS is a zone of calm contemplation. “UBS is in a unique period of strategic clarity,” declared chief executive Sergio Ermotti on today’s call. This compares to Credit Suisse, which is lurching towards Asia under Tidjane Thiam, Deutsche Bank which is in the grips of a new CEO who says it’s “swollen”, and Barclays which is quietly hiring but expected to make big cuts under a new executive chairman with a reputation for ruthlessness.
2. It’s paying higher bonuses
Good things happened to UBS bonus in the second quarter. They bank said personnel expenses had risen due to, “higher variable compensation expenses.” Spending on compensation in the investment bank rose by 9% in the first half of the year compared to 2014.
3. It’s comprised of a small elite of front office staff
Forget Goldman Sachs with its 34,400 employees, or Deutsche Bank with its 8,000+ front office investment banking staff, UBS is niche. Its investment bank is small and it’s elite. After honing its business over the past few years, UBS now employs only 5,192 people in front office roles. That’s small. You’ll need to be good to work there.
4. It has some very talented traders
UBS held Value at Risk (VaR) steady in the second quarter, but it increased equity sales and trading revenues by 30% versus the previous year and suffered a mere 3% reduction in fixed income, currencies revenues. This compared to a 28% reduction in fixed income revenues at Goldman Sachs and a 21% reduction at J.P. Morgan. Credit Suisse’s fixed income revenues only fell by 5%, but its equities sales and trading revenues ‘only’ rose by 18%. In sales and trading, UBS looks pretty good therefore.
5. It doesn’t really need to make any big cost reductions
Credit Suisse’s investment bank could be headed for some fairly gigantic cost cuts. Morgan Stanley analyst Huw Van Steenis estimates that CS needs to take out CHF1bn ($1.05bn) of costs across Europe to tackle its loss making EMEA operations. UBS is also cutting costs – the bank plans to remove another CHF600m of costs across the world by the end of 2015. However, the corporate centre seems to be the focus of the bank’s cost cutting efforts. By comparison, the investment bank – with a 73.6% cost income ratio – is comfortably within the target 70% to 80% cost ratio given in UBS’s investor presentation.
6. It’s massively more profitable than last year
In the first half of 2015, profits in UBS’s investment bank rose 32% on last year. At Credit Suisse, they fell 7%.
7. Equities sales and trading revenues are at their second highest level since 2012
UBS’s equity sales and trading business has been through a period of change following the departure of Phil Allison and other senior staff last year. The departures don’t appear to be detrimental, however: UBS’s equities sales and trading business achieved its second highest result since 2012.
8. It’s not all about advisory banking after all
Andrea Orcel, head of UBS’s investment bank is an M&A banker by trade. Under Orcel, UBS seemed focused on IBD. In fact, the M&A advisory business hasn’t done that well – booking a mere 12% increase in revenues in the second quarter (compared to an increase of 62% at the more US-focused Goldman Sachs). UBS’s investment bank actually looks more focused on equities and equity capital markets than pure M&A advisory work, with 62% of revenues coming from these combined businesses in the second quarter.
The only real blackspot at UBS’s investment bank is the debt capital markets (DCM) franchise, where revenues fell 51% year-on-year in the second quarter, a disastrous result compared to rivals.
9. It’s run by an ex-investment banker who is not overly obsessed with Asia and wealth management
Credit Suisse’s new chief executive, Tidjane Thiam, is an insurance professional by trade. He also has a clear tendency to fetishize the bank’s Asian and wealth management businesses.
UBS’s chief executive Sergio Ermotti is an equities banker by trader. He sees the investment bank as a vital part of a balanced portfolio of businesses.
10. It’s very well capitalized
UBS is safe, or comparatively so. In today’s presentation it stressed that it has the ‘ highest Basel III fully applied CET1 capital ratio among large global banks.’ See the chart below for full the extent of the differential (Click to expand). UBS’s investment bank also had a 36.1% return on ‘attributed equity’ year-to-date (compared to 26.1% last year). It’s return on gross assets was just 3.3%, but still….