Thursday, 21 June 2018

Nielsen set to survive as Hourican takes rap at RBS; Sharpening the UBS longs?

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So it’s goodbye, so long, farewell to John Hourican, CEO of Markets & International Banking at RBS as the Libor scandal takes another scalp. I first met Hourican when he ran leveraged finance for the bank some years back and I’ve always thought highly of him. But when you get stiffed for £87.5m, US$325m and US$150m in fines to the FSA, CFTC and DOJ, there ain’t nowhere to hide.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

That he’s taking the rap for rate-rigging has long been discounted. What’s a lot more surprising, in my view, is that Peter Nielsen, CEO of Markets, isn’t heading for the exit arm-in-arm with Hourican. Nielsen has been with the bank for years, coming to RBS via its acquisition of NatWest in 2000. He manages a broad church covering trading, sales, research and strategy, prime services and client execution, asset-backed products, credit, DCM and the financial institutions group.

Now Nielsen’s a good bloke; don’t get me wrong; but you’d have thought that he’d be in the line of fire given his set of responsibilities during the period in question. But not only is he not leaving, Nielsen has actually been promoted to be co-head of the about to be separated markets division alongside Suneel Kamlani (for whom the new position is arguably a demotion).

The urbane, polished and highly accomplished Kamlani is currently deputy CEO of M&IB, chairman of M&IB Americas and deputy head of RBS Group in the Americas. There were surely no more lofty titles they could conceivably have offered him. Co-running markets in the new world of RBS where M&IB is going to become M… as distinct from… IB … isn’t necessarily a bad option but it’s a slimmed down portfolio for sure.

And when you think about it, separating markets from international banking is kind of going against the flow. The current in-vogue thinking is towards integrating corporate banking with investment banking as those institutions that have the facility to do so focus on creating integrated CIBs platforms geared around cross-selling..

Ringfencing the division is kind of counter-intuitive but given the intense political scrutiny on the bank and politicians’ drive to force RBS to accelerate the lending function, you can probably see why Stephen Hester – who by the way looked pretty stressed and demoralised in his video today – is making the change.

UBS seen broadly positive in the bigger picture

IF RBS IS TODAY’S NEWS, the big flurry yesterday was UBS’s results and the series of related news items around its SFr5bn senior debt buyback; paying executive bonuses in the form of bail-inable contingent convertibles; ongoing impacts deriving from the scaling down of its investment bank; and progress in the wealth management business that it’s going to be relying on for its future.

Having watched the barrage of news around the Swiss bank on-an-off all day long Tuesday, it struck me that a lot of the coverage was news for news’s sake. I was rather gratified, therefore, to have watched an interview on Bloomberg TV in the morning with a rather dour portfolio manager from Zuercher Kantonalbank who put it all into a good perspective.

The interviewee refused to be drawn into the detailed questions he was being bombarded with around individual and specific lines in the quarterly accounts but he made his thesis very clear: that he was broadly positive about the in-process restructuring of UBS’s business model and felt that on balance UBS was a better bet than Credit Suisse. That’s because CS, he said, was continuing to rely an investment banking business model that would always lead to a more volatile and less stable earnings profile.

His comments were certainly of a macro nature and clearly not geared to the urgent short-term trading orientation that the news flurry seemed hell-bent on engendering. In fact, the ZK investor moaned that quarterly results kind of get in the way of the bigger picture. You know what? He has a point.

As for the numbers, no need for me to regurgitate the detail but taken in the round, digging away the net charges for litigation and regulatory provisions; restructuring charges, impairment losses on goodwill and other non-financial assets and own credit loss on financial liabilities; and discounting the charges resulting from the already announced closure of chunks of the FICC business, the numbers weren’t as bad as they might have been on a snapshot in time basis.

OK, so net new money into wealth management of SFr2.4bn compared badly with SFr7.7bn in the previous quarter and analysts’ estimates of SFr6.8bn, but Wealth Management Americas saw net new money of SFr8.1bn, almost double the previous quarter, which the bank partially attributed to US fiscal cliff timing issues.

So what’s the problem? I guess it’s either the risk that the strong Asia-Pacific and EM inflows are considered one-offs, or conversely that the European outflows end up being hard to reverse. I haven’t seen anything recently that suggests either is the case so should we be net long UBS?

When all’s said and done, the net loss of SFr2.078bn beat analysts’ forecasts, risk-weighted assets are down at the investment bank, capital ratios are up – the group exceeded its year-end capital targets and its Basel III CET1 ratio hit 9.8% at year-end – and the dividend payout is 50% higher.

The senior debt buyback coming on the back of lower liquidity and funding requirements may lead to negative DVA charges deriving from the resulting tightening in credit spreads, but that’s an accounting absurdity that has no impact on the underlying business.

Lower revenues in the securities business came partly as a result of the harried shutdown of the FICC business, And while cash equities was on balance up, equity derivatives trading losses spoilt the overall number. Revenues in investment banking improved on the back of higher capital market revenues.

So interesting, so what? What I don’t get is that if the balance of opinion is favouring UBS’s business model over CS, why has CS stock performed better than UBS? They’ve followed a similar trading pattern but Brady Dougan definitely has the edge over Sergio Ermotti in the fishbowl race that is Swiss banking.

CS results are imminent so I’m bottling out of making a call on this one but could UBS about to edge ahead of its rival as 2013 rumbles on?

Back after the results.


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