This time last year Sergio Ermotti was riding high. The UBS chief executive was basking in a double-digit jump in quarterly profit and boasting of the bank's "excellent" prospects.
His decision six years earlier to refocus on wealth management and slim down the investment bank looked to be paying off — the model he pioneered was copied by Credit Suisse and Morgan Stanley.
A year on and the narrative is very different. Over the rest of 2018 the stock plunged 30 per cent as steep swings in markets caught traders off guard and convinced ultra-rich clients to keep their cash on the sidelines.
The past two quarters have produced dramatic declines in earnings at the investment bank and world-leading US$2.4 trillion ($3.6t) wealth management unit. In response, Ermotti has put the bank in what he calls "fuel saving" mode — freezing hiring, slashing bonuses and delaying spending on technology projects.
On top of this, a gamble to go to court and fight accusations of tax evasion in France backfired in February when a judge slapped UBS with a record €4.5 billion ($7.7b) fine, which led to a shareholder revolt against executives at its annual meeting this month.
Analysts at Barclays now say "a more significant overhaul of strategy may be warranted" after a "material downgrade" to expectations since the last strategic update in October, when executives stuck to essentially the same course.
"Many investors we speak to believe UBS should be able to achieve higher returns, and have been frustrated for some time in this regard," said Barclays' Amit Goel.
"It is worth reassessing whether one-third [of assets] is the right resource allocation to the investment bank and if the group should target ultra-high net worth clients as aggressively" considering how expensive they are to acquire and service.
UBS now trades at a 20 per cent discount to the book value of its assets, compared to a 50 per cent premium at smaller Swiss rival Julius Baer, which does not court multi-billionaire clients as aggressively or run a large investment bank. Bigger US rivals such as JPMorgan Chase trade at an even higher multiple.
Tone from the top
Some insiders say UBS has lost its edge since the shock departure of Andrea Orcel as head of its investment bank. The notoriously hard-charging Italian dominated the unit for six years until he quit last September to become CEO of Santander, only for this to fall through after disputes over his pay and profile.
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"We've had two terrible quarters and we could have done with Andrea here," said one UBS banker. "He had his hands around 10,000 throats . . . I'm not as 'on it' as I was when he was here; I was terrified before. He's very difficult to replicate."
But supporters of Orcel's replacements — M&A banker Piero Novelli and equity trader Robert Karofsky — say it would be wrong to interpret the arrival of a kinder, more consensual culture at the investment bank as a lack of focus.
They argue that while Orcel's more intense attitude might have made sense in the past, it hurt morale and since he left resignations in the advisory and capital markets unit have halved.
"The first thing Piero and Rob did was to change the culture in the investment bank, which historically had contributed to attrition in the advisory business," said one senior executive.
"They are moving from a top down, hard-charging, just for the sake of it attitude to one of partnership, ownership and accountability. It's the right move for this phase of the bank."
A sharp drop-off
Still, the recent drop-off in performance is stark and executives are debating deeper cuts in the wobbling investment bank.
The unit made a surprise US$47 million loss in the fourth quarter and pre-tax profit plunged 64 per cent in the first three months of 2019, which Ermotti blamed on the "worst first-quarter environment in recent history" and a tough comparison with the stellar start to 2018.
Despite being shrunk back to a supporting role, the investment bank still accounts for a third of the group's US$268b of risk-weighted assets — more than wealth and asset management combined — despite making only a 6.8 per cent return on equity in the first quarter, down from 16 per cent last year. That compares with 30 per cent returns in both wealth management and personal and corporate banking.
"Our investment bank has been returning its cost of capital and is integral to wealth management and the corporate business in Switzerland," said chief financial officer Kirt Gardner. "Without it we wouldn't have our ultra-business serving sophisticated family offices."
Ominously, the steepest first-quarter falls came in the bank's traditional strongholds of equity trading, where profits dropped 22 per cent, and capital markets and merger advisory, where it dropped 48 per cent. The latter was far worse than rivals.
"UBS is not a US giant with a huge balance sheet and a large product suite," said one person involved in setting strategy. "The only way you win is by running faster, riding the organisation hard, taking decisions fast and getting it tight like a tambourine."
"They have stopped putting pressure on the organisation, there is a lack of relentless drive," the person said, referring to the mood since Orcel left.
The missed opportunity
Internally, critics say some of the pain could have been avoided. Anticipating a downturn in markets, last autumn UBS executives had drawn up plans to reshape the division and preemptively reduce expenses. But they decided against it, two people involved in the process said.
"By not taking decisive action when we should have we've now spent all of the first quarter debating cuts, not driving the business," one of the people said.
Ermotti, 58-years-old and now in his eighth year in charge, has started to take remedial action and has promised more if things do not improve.
He partially offset the 27 per cent drop in first-quarter investment banking revenue by cutting expenses 14 per cent, largely through a US$372m reduction in the bonus pool. Nevertheless, the ratio of costs to revenues still rose to 86 per cent, its highest in years.
"We have to balance matching pay to performance, whilst not damaging the franchise by losing our best people," said a UBS executive.
"But there is a major structural problem in the industry because pay hasn't come down to the same extent as the revenue pool. That's not sustainable."
However, shareholders are still annoyed by a lack of cost discipline. An example of this frustration came after UBS reopened its refurbished century-old headquarters on Zurich's Bahnhofstrasse in December.
"We have this giant new board room with a huge table, perhaps the highest ceiling I've ever seen — all very intimidating — with massive TVs on the walls," said one managing director. "When some investors came in and saw it they thought: 'What cost cuts?'" UBS said it has "not held meetings with shareholders in the boardroom".
More trimming required
The fresh cost-cutting plan Novelli and Karofsky are reviewing is characterised as "more fine-tuning" than "radical overhaul" by one executive involved.
An early move came last month when UBS restructured its US unit, merging the capital markets teams and wealth units in an attempt to sell more investment banking products to early-stage entrepreneurs and ultra-rich American clients. It also aims to attract US$70b of new money for its US wealth unit over the next three years.
This is based on the success of arch-rival Credit Suisse's "international trading solutions" unit, which was created last year to improve cross-selling of complex structured finance products to big family offices.
UBS is considering extending this cross-selling drive — known internally as the "Lexington" project — from the US to Europe and Asia, one person said.
Ermotti has argued the bank's problems stem from the climate of political and economic uncertainty that is weighing on market activity and hurting many banks.
UBS said rich Asian clients are keeping a near-record 36 per cent of their assets in cash, spooked by US President Donald Trump's escalation of his trade war with China, while eurozone interest rates are still negative and Brexit remains in limbo.
"We are not a sleepy organisation, nobody panics when the model adapts," said George Athanasopoulos, head of currency, rates and credit trading at UBS. "I have been in fuel saving and optimisation mode for years."
Despite the downturn, UBS is still one of the more consistently profitable banks in Europe, reporting a return on equity of 10.8 per cent last year, outstripping its main rivals Barclays, Deutsche Bank, Credit Suisse and BNP Paribas.
"I don't see a strategic decline, their business mix and geographic focus [on Asia and Europe] accounts for recent poor performance," said Magdalena Stoklosa, analyst at Morgan Stanley.
"There is no need for restructuring after two weak quarters, but some trimming around the edge is required, as global revenue pools shrink."
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Written by: Stephen Morris and David Crow
© Financial Times