Bank of the Year: UBS

IFR Review of the Year 2015
18 min read

Setting a new benchmark

How often has any bank been able to lay genuine claim to creating a benchmark for how the business is conducted? Faced with some tough decisions about its own future amid the chaos of the new order, UBS fashioned an innovative and sustainable operating model that is now a blueprint for others to follow. It is IFR’s Bank of the Year.

“Doing a UBS” has entered the lexicon of modern banking. It is a phrase that has come to mean deriving strength from adversity; making bold decisions around client and product strategy, and geographical footprint. It means having the courage to make tough choices and, perhaps most importantly, it means a genuine focus on shareholder value.

Banking strategy is now defined in terms of how close it is to what UBS has done. That’s some accolade.

UBS’s strategic audacity incontrovertibly marked the end of banking as “‘all things to all people globally”. Group CEO Sergio Ermotti, architect of the bank’s transformation from a post-financial crisis basket case, has a disarmingly modest description of what he has achieved. He sees the bank’s dramatic shift in fortunes as the articulation of his long-held conviction that the concept of the one-stop shop in investment banking was ultimately doomed.

“I never believed that major clients cared if we were able to do everything for them. What they cared about was that we were top-notch on specific assignments,” he said. “We had a set of core competencies: we had a franchise in equities, we had a franchise in FX and we were seen as a major capital markets house.

“We didn’t need to be big in fixed-income to justify our credentials in investment banking. And frankly we could afford to work our strategy without the group being too dependent on the investment bank, given our strong franchises in wealth management and our Swiss universal bank.”

What makes UBS’s capital-light, balance sheet-light, returns-oriented, client-centric, stripped-down IB business model so remarkable is not just its formulation. In truth, the real achievement has been driving through the upheaval day-by-day; getting staff, clients and counterparties on side; rebuilding trust and confidence in the brand; re-instilling internal passion; and laying to rest so many entrenched and outmoded views.

“I was convinced it was more about execution than feasibility. Bearing in mind where we were coming from, people said no one had ever managed what we were attempting to do. My point was that nobody else had a franchise like ours,” Ermotti said. “But key to getting it done was the relentless discipline we imposed on ourselves.”

Orcel at the helm

To help execute the strategy and provide leadership to the investment bank, Ermotti turned to market titan Andrea Orcel, with whom he had previously worked at Merrill Lynch. Orcel took sole charge of the investment bank in November 2012.

Joining UBS was a career-defining moment for the flamboyant (and at times controversial) Orcel. Having engaged with FIG clients as a trusted adviser for years, this was an altogether different proposition akin to conducting an experiment on oneself.

Orcel acted with alacrity in assembling an experienced team around him. To begin with, he acknowledges, attracting the best people wasn’t easy. But as the model he and Ermotti put in place began to prove itself, it became easier to bring in senior talent to provide ballast to the build-out.

In 2015, UBS hired a raft of senior bankers in M&A, in sector coverage across multiple industries, and elsewhere. Their arrival was a clear sign that people were buying the narrative and wanted to be part of the culture of success that was becoming ever more visible.

“We’ve gained share in every business I’ve chosen to compete in: in equities, equity derivatives and within FRC. In three years we have created a model, a strategy, an approach that’s had everyone talking about it and where people are now saying: ‘UBS is a benchmark. Let’s do a UBS’,” Orcel said.

“In my career I’ve never seen anything like it. We’ve done something different; something different that was criticised by everybody at first but something different that in the first three quarters of 2015 ran counter to everybody else on the upside.”

Ermotti and Orcel have steered UBS’s investment bank broadly to an old-school agency IB model providing advisory and financing services with a client-focused research, sales and trading platform behind it.

Orcel’s analogies are clear: He refers to the excess capital-driven product-led cross-sell ancillary IB models that commercial banks adopted following the abolition of Glass-Steagall as the Walmart approach, preferring to think of classic investment banks as more like Louis Vuitton; or it’s Fiat versus Ferrari. True investment banks, he says, have excellence in fewer places but do business a lot more profitably.

Excellence at UBS IB is focused on five core areas: advisory, research, equities, foreign exchange and precious metals. These were identified in what the bank refers to as the Accelerate project.

Accelerate was the name given to Phase 2 of the bank’s three-stage restructuring programme and was launched in November 2012. If Phase 1 had been to strengthen, deleverage and de-risk at the group level, the two-year Accelerate process focused on transforming the investment bank and initiating long-term efficiency and productivity measures.

Phase 3, from 2015 on, is about unlocking the group’s full potential: achieving operational strength and efficiency; optimising targeted businesses and cross-synergies and delivering continued attractive returns, yield and growth.

“What we did with Accelerate was to shrink the investment bank but we didn’t want to take good businesses down with bad. We looked at the intersection between what we did well, where we were excellent and where we could make money, factoring in regulation. We wanted to be an investment bank defined by leadership in the areas we chose to compete in with superior risk-adjusted returns,” Orcel said.

“To be frank, we realised UBS was neither very good at fixed-income nor had the advantages that some of our bigger competitors had because we didn’t have balance sheet. We also realised that equities were in our DNA. We realised too that we were a leader in Asia but had fallen back quite a bit in Europe and aggressively so in the US. So we took the courageous decision to reposition and resize dramatically.”

What a lot of people miss in the UBS story, Orcel says, is that the investment bank’s resource base has shrunk by 60%-plus. Pre-Accelerate, the investment bank used US$500bn of funded assets. Today, it’s consistent at around US$175bn.

“We have delivered results using a fraction of the balance sheet and other resources utilised by others but with much higher recurring returns,” Orcel said.


One of the key successes of UBS’s rebuild lies in its sustainability over the 11–12 quarters since the launch of Accelerate. The first three quarters of 2015 were the most impressive and consistent from a returns perspective.

In the first nine months of 2015, the investment bank posted consecutive quarterly adjusted returns on attributed equity of 46.2%, 33.8% and 33.6%. That was a step-change above – and smoother than – the (still impressive) quarterly numbers for 2014 and 2013. The group posted a return on tangible equity of 18.3% at the nine-month 2015 stage.

Those numbers are simply best-in-class (though they only include, it is worth pointing out, the “core” units of the investment bank, stripping out non-core business that was previously part of the investment bank but whose results have been reported through Corporate Centre since the first quarter of 2013).

Ermotti did push back some previously announced profitability and performance targets in November 2015, on the back of the Swiss G-SIB capital proposals. But while some reacted with disquiet, most were sanguine.

“The long-term path of UBS is clear. There will be quarterly volatility but we do not see recent changes to RoTE, leverage or RWA targets as anything more than UBS being realistic about the operating environment. This is what makes it a long-term winner, in our view,” wrote James Chappell, a bank analyst at Berenberg, on November 18.

Powering back

UBS has either already powered its way back to leadership positions or is actively taking steps to get there. In ECM, it ranked fourth worldwide in IFR’s awards year (November 16 2014 to November 15 2015) and was the top-ranked non-US house. It ranked second in EMEA ECM and was fourth in global IPOs, within a whisker of a top three position.

In Asia-Pacific, UBS ranked second in overall ECM (neck-and-neck with leader Goldman Sachs on volume) but it did 21 more deals than its US rival and executed more trades than any other bank in the region. In Asia-Pacific IPOs, UBS nailed it, ranking number one with a 100bp market-share gap to Morgan Stanley in the number two spot.

Collaboration between the investment bank and wealth management is most advanced in Asia and where the UBS story is perhaps most developed.

“Asia’s traditional weighting toward ECM continued and our dominance in that area increased. We also developed several innovative M&A structures in direct response to client needs and really played to the solutions mind-set of our business,” said Matthew Hanning, head of CCS Asia-Pacific. CCS houses the bank’s advisory, financing and solutions businesses for corporate, FIG and sponsor clients.

“Clients continued to turn to us for their financing needs, especially where high intellectual value-add or specialised structuring was required,” Hanning said.

In UBS Securities (UBSS), UBS has the most successful domestic securities platform in China of any international bank, and this stood the bank in great stead to continue serving Chinese clients across domestic and international markets. Through shareholder agreements, UBS effectively has control of its China securities business, even though it only has a 24.99% stake (an additional 4.99 percentage points were added in June 2015).

Aligning its domestic China securities business with its dominant wealth management franchise and leading investment bank is a powerful combination that lay at the heart of a tally of regional successes again in 2015.

To promote best-practice and strengthen the collaboration of its onshore and offshore China teams, Ding Xiaowen and Bi Xuewen, co-heads of CCS at UBSS, rotated during the year to UBS AG’s CCS China team in Hong Kong, while Jiang Guorong, vice-chairman of Asia and head of CCS China for UBS AG, moved to Beijing as head of CCS for UBSS.

In Australia and New Zealand, UBS has one of the country’s largest and most accomplished corporate finance practices. In Australia M&A, UBS was a top three player in IFR’s awards year as the bank advised on many of the country’s leading deals, including BHP Billiton’s non-core spin-off, the Federation/Novion REIT merger, the Asciano acquisition, as well as the sale of the bankrupt ITR toll-road concessionaire.

“China and Australia were very much to the fore over the last 12 months. We were once again the most active international bank in China, across both domestic and international activity, and the gap to our international competitors increased,” Hanning said.

An active market in Chinese domestic bond issuance, especially in the latter part of the year, combined with the bank’s high-yield bond activity for a very successful year in DCM to round out its product accomplishments.

M&A progress

UBS got itself onto the tickets of some stand-out advisory, ECM and debt financing transactions in 2015, some of which are IFR deals of the year, such as the Ferrari IPO or Santander’s swashbuckling €7.5bn capital increase, Europe’s largest-ever accelerated bookbuild.

While the bank has won some plum takeover mandates, M&A on a worldwide basis remains something of a work in progress. Worthy of note is the bank’s performance in US M&A, an area it is working to rebuild.

UBS staged something of a coup in 2014, hiring Wall Street veteran Ros Stephenson to chair global investment banking and head up CCS in the Americas. The bank went into full hiring mode in the US in 2015, adding more than 20 managing directors over the year.

UBS was sole adviser both to Marathon Petroleum on its US$22.8bn merger with MarkWest Energy Partners and to Brighthouse Networks on its US$10.8bn acquisition by Charter Communications. It was also on Walgreens/Boots’ US$17bn Rite Aid buy (solo pilot on the bridge); on the US56bn Williams/ Energy Transfer ticket as well as Anthem/Cigna (US$49.4bn); and Molson Coors/AB Inbev (US$12bn).

“We have succeeded in migrating our business mix to be more heavily M&A and equity weighted, while maintaining a leading role in acquisition finance,” Stephenson said.

Trading excellence

UBS’s franchise-defining cash equities and equity derivatives operation remains top notch.

“Everyone in global equities has felt the spotlight since 2012, and it’s always been clear that nothing short of excellence would be acceptable. Our task has always been to grow client business and market position with more discipline and greater focus,” said Robert Karofsky, global co-head of equities.

“This past year, our results have shown that this is exactly what we are doing. Every region and product is performing as we build on our strengths whilst focusing on maximising risk-reward and return on resources – two areas where we believe we are ahead of our competitors right now.”

With regard to equity derivatives, UBS was able to use its broad access to wealth and institutional flow to manage its exposures efficiently via sophisticated market-making technology and internal crossing engines. That helped it retain a leading position in public structured product distribution even as others ran for the exits amid periods of extreme volatility.

The bank offered clients an array of innovative investment, hedging and financing solutions as a deluge of regulatory change proved to be a hotbed of innovation. UBS pioneered pre-IPO performance-linked notes and dominated the Hong Kong warrant market, while the customised notes available on the UBS Equity Investor platform in the US catapulted the bank to a leading position in that market too.


If equities performed well, the bank’s scaled-down FX, rates and credit business out-performed its peers in 2015. In its third-quarter release, analytics firm Coalition tagged UBS as one of the strongest two performers year-on-year.

FRC was powered by macro trading, particularly in its core FX spot, forwards and options offering. Unlike many competitors, events such as removal of the euro/Swiss franc floor played to UBS’s strengths and offered an opportunity to demonstrate the consistency of its platform and how it could service clients throughout that volatile period. The bank also gained ground generally in e-trading and solutions.

“There was a clear view that we would totally fail in our restructuring; that we would become an irrelevance because we would not be able to compete. We had to take some tough decisions but it’s forced us to innovate and do something radically different. Our differentiated approach is now being recognised and emulated,” said Chris Murphy, global co-head of FX, rates and credit.

What UBS has achieved is, in summary, remarkable but the work is not over.

“We’re facing as many challenges now as we did before. Regulatory changes, market uncertainty and the shifting competitive landscape demand continued evolution. But without being complacent, the challenge ahead is more of an exciting one,” Orcel said.

Of course, the ultimate test of this success is shown by the fact that UBS can claim to have happy shareholders – not something every bank can boast.

“What I’m most gratified by is seeing shareholders embrace our strategy and reward us with a stock multiple way above our peers; and seeing perceptions of major stakeholders transformed. We’re now seen as a credible organisation that I and my colleagues are proud to work for,” Ermotti said.

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Bank of the Year: UBS cartoon
Bank of the Year: UBS