Thursday, 19 April 2018

Orcel gets his hands on UBS’s investment bank

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When Andrea Orcel jumped ship from Bank of America Merrill Lynch to join UBS as co-head of the investment bank back in March, I wrote: “one thing’s for sure … Orcel’s arrival will be Kengeter’s exit trade … I can’t imagine Orcel will stomach being co-CEO for any length of time”.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

It may have come a few months into Orcel’s reign, but come it did. As part of UBS’s decision to get rid of 10,000 people over the next three years and shutter a bunch of (mainly fixed-income) businesses – described wonderfully by the bank as its “strategic acceleration from a position of strength” – Kengeter has been removed from the group executive board with immediate effect. He was moved by group CEO Sergio Ermotti – Orcel’s mate – to head the run-off businesses.

Of course, Kengeter’s last run-off trade will be to run himself off of UBS’s payroll. So Orcel is now sole head of the (albeit rapidly shrinking) investment bank, a position I suspect he demanded as a condition of his joining.

Yet what the bank said was its strategy to transform the firm and create the UBS of the future is in so many ways a return to the past…

Shrinking though it might be, it’ll definitely be an investment bank that’s much more closely aligned with Orcel’s expertise and comfort zone of equities and advisory. He’s never had much truck with fixed-income and that’s the bit that to-date has borne – with good reason – and will continue to bear the brunt of the cost and RWA reductions and business-line pruning. As of January 1 2013, UBS’s investment bank will to operate with Basel III RWAs of less than SFr70bn.

Ever since the bank unveiled its comprehensive rehab strategy at its Investor Day almost exactly a year ago, the management team has been diligently keeping its nose to the grindstone and pushing ahead with the intent of that plan, which in the light of how the investment banking business has evolved over the course of this year and against the backdrop of a capital regime we already knew was going to be especially tough on certain businesses, looks to have been spot on.

Advisory, equities, FX and precious metals

Yet what the bank said was its strategy to transform the firm and create the UBS of the future is in so many ways a return to the past in that it’s going to be relying on what it called its traditional strengths of advisory, equities, FX and precious metals.

The investment bank is being reduced to its simplest form: the two buckets it has been re-organised into – corporate client solutions and investor client services – are nothing if not simple and transparent. The latter – which houses execution, distribution and trading for institutional investors – will absorb 85% of IB RWAs and account for two-thirds of revenues. Corporate clients will be just that: corporate, FIs and sponsors. Notably missing from that list are public finance clients (sovereigns, supranationals and government agencies): SSA syndicate, origination, sales and trading has been culled.

Now that Orcel has his hands on the investment bank, should we expect some changes to the make-up of the IB executive committee? You’d have to assume so, mainly because it kind of comes with the territory. You’ve surely have to wonder about the longevity of Roberto Hoornweg and Rajeev Misra, global co-heads of FICC. Hoornweg joined in 2010 after 17 years at Morgan Stanley, while Misra, one of Anshu Jain’s former derivatives lieutenants at Deutsche Bank for 10 years, joined in 2009. Both achievers with solid track records, you just wonder what’s left for them at UBS given the sharp reversal in a FICC business much of which is being forcibly crammed into Kengeter’s run-off vehicle.

You’d probably have to bet on Mike Stewart remaining in situ. UBS’s global head of equities has only been at the firm for a year, hailing from Ermotti and Orcel’s former home: Merrill Lynch. He lucked out big time as he joined the firm just when former incumbents Yassine Bouhara and Francois Gouws were walking over the Adoboli trading scandal. He was originally going to share management of the equities business with Gouws.

Double act

On the investment banking side, joint global heads Matthew Grounds and Simon Warshaw look to be a good combo. Both UBS veterans, they have some serious deal-making experience. Of the two and on the basis of league-table showing, Grounds has the higher hit-rate. It helps that he’s based in Australia, where UBS has a stand-out business. In fact, UBS ranks number two in Australian announced M&A year-to-date (behind Macquarie) and is number four in Asia. In ECM, UBS is the runaway number one-ranked underwriter in Australia while it’s top three in Asia.

The European M&A and ECM businesses have had more of a mixed year. In European M&A, UBS is sitting in a potentially uncomfortable 11th position (although 6th in the UK). But with the addition of inveterate dealmaker and relationship banker extraordinaire Orcel, you’d also probably want to bet on UBS’s M&A fortunes picking up.

David Soanes is UBS’s highly regarded head of global capital markets. The fact that he’s a debt banker may make a difference to Orcel who may want more of an ECM playmaker around him. You also wonder how the shuttering of a chunk of the supporting FICC business will impact the DCM business.

That said, Soanes is a FIG specialist, and FIs continue to be a core business for the bank. Plus, the bank’s said that in flow rates and credit it would maintain risk facilitation capabilities aligned to the DCM and wealth management franchises. OK, I have no idea what that really means, but it kind of sounds supportive of the bits of the underwriting business that survive in the corporate client solutions segment.

On a capital markets league-table showing, UBS is actually looking OK-ish, ranking 10th in global combined debt and equity underwriting; 10th in global DCM (ex ABS/MBS) and eighth in global ECM.

But when Ermotti says the investment bank “will continue to be a significant global player in its core businesses”, I suspect significant global player and the bottom end of the top 10 don’t necessarily jive.

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