UBS’s investment bank has just had a very good quarter. Increased revenues across its advisory business – particularly equity capital markets (ECM), which soared by 132% on Q3 2016 – meant that overall profits increased by 67% year on year before adjustments. Are things really that rosy? Here are the key figures to know.
1. UBS’s headcount cuts are broadly over
UBS’s investment banking headcount has now barely fluctuated over the course of the past year. This is a marked change since the bank drastically shrunk its investment banking balance sheet in 2012 and cut 5,200 jobs – primarily in its investment bank. Headcount increased by 81 people in the third quarter, when it brings in new graduate hires, but employee numbers are broadly flat over the course of the past 18 months.
2. Equity capital markets is the place to be
As the chart below shows, profits at UBS’s investment bank were up 67% in the third quarter, despite revenues remaining broadly flat across the business. The big winner within UBS’s investment bank is its equity capital markets business, which increased revenues by 132% on last year. UBS said that revenues were up in both IPOs and private listings. Meanwhile, its M&A and debt capital market bankers both managed to increase revenues by 9% year on year.
3. Costs remain stubbornly high
UBS said that it had cut personal expenses by 10%, which it says is down to lower salary costs, but on a pay per head basis compensation is broadly flat so far in 2017 at CHF476k (versus CHF475k for the first nine months of last year). Despite its ongoing focus cost-cutting, UBS’s cost-revenue ratio remains high relative to its peers. It was 80.5% in the third quarter – broadly flat on 2016. The only bank with a comparable cost-income ratio within its investment bank in Q3 was Deutsche Bank, where revenues plunged by 23% – more than any other investment bank.
4. UBS’s FICC revenues fared worse than any other bank in Q3
UBS’s fixed income business is a drag on the overall investment bank. Despite the surge in ECM revenues, a 37% decline in its fixed income business – which is now called foreign exchange, rates and credit (FRC) – wiped this benefit out. Overall, UBS’s trading revenues were down 15% year on year. The CHF294m it made in FRC were less than half the CHF784m its equities traders brought in.
In response to an analyst question on whether the gradual shrinkage of its FICC business was a deliberate tactic, UBS CEO Sergio Ermotti said that “we are not masochists”. In fact, UBS’s fixed income business is now highly reliant on FX revenues, he said, and volatility within this market in Q3 was “dead”.
5. The investment bank still has a big part to play
For the past few years, UBS has made it very clear that – first and foremost – it is a wealth manager. But this doesn’t mean that the investment bank is a complete irrelevance. Like Credit Suisse, UBS still needs its investment bank for synergies – both to offer investment banking services to demanding ultra-high-net-worth individuals and to help channel business to other parts of the bank. Ermotti said that the investment bank was an important “feeder” into the wealth management business. This is particularly the case in Asia, where billionaire clients are demanding more sophisticated investment banking products. It could provide an opportunity elsewhere in the future – Ermotti said that they see “a lot of potential” to create a similar type of business, feeding investment banking clients to the asset management and wealth management business, in the U.S.
6. UBS will be making Brexit moves early next year
In theory, UBS is still on the fence when it comes to relocating its employees out of London after the Brexit vote. Reports last week suggested that it was canvassing opinions from its investment bankers on whether they wanted to move to Amsterdam, Madrid or Frankfurt. Investment bank boss Andrea Orcel said that staff preference would determine their decision to move around 1,000 staff out of London as the UK exits the European Union. Some banks are hoping that UK prime minister Theresa May manages to secure a transition deal with the EU so that they can hold back on their contingency plans. UBS is not waiting around.
“The UK is still expected to leave the EU in March 2019, subject to a possible transition period. We intend to begin implementation of contingency measures in early 2018,” it said.
However, Ermotti played down Brexit moves in a call with journalists. He said that the 1,000 job moves estimate, made by chairman Axel Weber in January, were “more and more unlikely”. The bank has received more clarity from regulators around Brexit, and UBS’s worst-case scenario may no longer happen. No decisions had been taken, he insisted, while also pointing to the fact that it has the necessary banking licenses in Frankfurt.
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