UBS’s investment bank has been a trailblazer in investment banking shrinkage and this has been reflected in its second quarter results. Its pre-tax profits were down 48% year on year, to CHF284m, and even its prized equities business posted double digit percentage declines. This is what you need to know.
1. UBS’s investment banking headcount is only very slowly shrinking
Despite Andrea Orcel’s recent statement that UBS had finished firing people in its investment bank, the overarching theme was continuing cost efficiencies. 204 people have departed over the past quarter, and headcount stands at 5,014. Relatively speaking, it is a big quarterly decline.
At the same point in 2013, UBS had 5,165 people in its investment bank, but last year it had 5,243. UBS appears to have been showing more people the door in its investment bank in the first half than at any point in the last couple of years. It spent CHF52m in the first half of 2016 on staff restructuring costs, but shelled out CHF14m on this for the whole of 2015.
2. Pay is down by 17% in the first half
Compensation is on a downward trend, even when you account for fewer people within the investment bank. It paid an average of CHF310.5k for the first half of this year, whereas pay per head was CHF375k for the comparable period in 2015.
3. The Brexit bounce was minimal
Like most investment banks, UBS’s FX, credit and rates team enjoyed higher trading volumes in the build up to and immediate aftermath of the Brexit vote. It made CHF461m in this division in Q2, a 12% uptick year on year, but it was actually down 5% on last quarter.
CEO Sergio Ermotti said during the earnings call today that Brexit was a negative factor in “at least 10 weeks” during the second quarter. One or two days before, volumes picked up, he said, and again after the vote, but overall it was far from positive. His comments echo those of Morgan Stanley CFO, Jonathan Pruzan, who said that “one or two days” of spiked activity do not make a quarter.
4. Its UK presence could diminish a lot after Brexit
UBS said in a statement that “limitations on providing financial services into the EU” from the UK could lead to make “potentially significant changes” to its London operations. Ermotti said during the conference call that it was still “way too early” to make any decisive calls about moving out the UK, but that UBS has a “significant local presence” in continental Europe for redeploying “resources, if necessary”.
5. Asia looks extremely shaky
Revenues in UBS’s Asian investment banking division were down 40% year on year. This is a worrying slump and can’t be pinned entirely on the fact that equities revenues for most investment banks in the region are falling.
CFO Kirt Gardner said that primary issuance had been particularly weak in the second quarter – especially in north Asia – and that there had been “muted levels” of activity within structured derivative products in its equities division.
6. Equities is suffering
UBS’s equities division is supposed to be jewel in the crown of its investment, its strength as it focuses less on fixed income markets and other capital-intensive businesses. However, year-on-year, revenues are down 22% for the quarter, to CHF878m. What’s happening?
Well, equity derivative revenues have fallen off a cliff – from CHF332m in Q2 2015 to CHF144m this year. As we’ve said, a lot of this was down to lack of demand in Asia, but Gardner also said that derivative revenues had suffered in Europe. The only upside was an increase in cash equities revenues in the U.S.
7. Leveraged finance is the place to be
The big positive in UBS’s advisory business was debt capital markets. Revenues were up 32% year on year, to CHF237m. The biggest driver of this was leveraged finance activity in the U.S, said the bank.
Its advisory business was down 10% year on year, which UBS says was down to a decrease in private transactions while its M&A revenues were up.