The credit crunch has played out in different ways at the two Swiss banking giants. UBS has been damaged significantly; Credit Suisse has emerged stronger relative to its local and international peers. When it comes to capital markets business, however, the distinction is less obvious. CS has certainly strengthened its position but UBS has not fallen behind as some might have expected. Matthew Davies reports.
At the beginning of 2007 those looking at UBS and Credit Suisse would have little doubt which institution would have survived a once-in-60-years financial crisis in best shape. UBS ran its capital markets and investment banking operations conservatively – too conservatively, many of its employees said.
UBS had also steered clear of the apparently building excesses. It wasn't the most enthusiastic player in leveraged finance and punched below its weight in structured finance. Its New York traders may have built up some positions in US sub-prime CDOs but only in the Triple A stuff, and what exposure the bank had was well hedged.
CS, on the other hand, was still doing its best to live down the free-wheeling, fast-living days of Credit Suisse First Boston. CEO Brady Dougan was trying to reign in any excesses but the surely the DNA of the firm had excessive risk-taking and rampant ego-led banking built in? If there was one bank that was dangerously over-exposed to leveraged finance, surely it was CS. It was also no slouch at structured finance, with a considerable business devoted to CDOs and sub-prime mortgages.
Like with much conventional wisdom, the last 18 months or so have overturned these assumptions spectacularly. CS, it turns out, was the disciplined institution that had best read the runes of the approaching cataclysm. UBS, on the other hand, had bought up much of the 2005 to 2007 vintage US sub-prime CDOs with the abandon of a drunken sailor buying rounds in a waterfront bar.
Looking on the bright side
David Soanes, UBS’ head of global capital markets in the EMEA region, is adamant that its capital markets business has been essentially unaffected by the wider damage that the credit crisis has done to UBS.
"It's been a lights out year in DCM. Fees are up, market share is up and we're doing a greater than ever percentage of high-value products, which means revenues are up," he said.
This has been helped by the fact that the areas on which the bank has traditionally concentrated its efforts, and built up considerable expertise – FIG and emerging markets, for example – have been amongst those areas where issuance has continued to thrive.
ECM-wise, Soanes identified the bank's many successes, arguing UBS has more than held its own in 2008. He is nonetheless more downbeat about the near future, in particular the prospects for issuance for the rest of the year, purely because of the likely issuance climate. It has done a good job with rights issues, he stressed – which is likely to remain a bright spot for the rest of the year – while the bank's top FIG franchise will ensure that it will still grab its share of those deals.
He denied that UBS has been forced to avoid certain transactions because it simply doesn't have the balance sheet strength to compete with rivals, citing rights deals for the likes of RBS to support his case.
Even the structured finance picture is not all doom and gloom: UBS ABS pros in Europe said they are as busy as ever structuring deals for banks needing eligible collateral to repo with the ECB and the Bank of England. True, such deals aren't as lucrative as properly distributed RMBS transactions – only arranging fees are paid – but they still keeps the wolf from the door.
The undeniable fact that UBS has never been an institution that led with its balance sheet has also helped the firm in these tricky times. "We're well practiced in winning deals thanks to our advice – not our balance sheet. Others are not so good at that," said Soanes.
Overall, he argued the crisis has provided opportunities that UBS is well positioned to take advantage of. "Clients have realised that the ability to raise money is not a commodity. And that stands us in good stead,” he said.
"We've never been a bull-market bank. This is our sort of market – ducking and diving, bobbing and weaving and winning deals. That's what we're good at."
Talking to many at UBS it is hard to avoid the impression that they have been pleasantly surprised – if not close to amazed – about the strength of their client franchise, particularly in capital markets and investment banking. "It turns out that clients don't really care about our problems very much – they want to know what we can do for them. They value our ability to give them the best advice and provide the best execution, all the rest is irrelevant," said one UBS banker.
Perhaps for that reason, morale at UBS – at least in the capital markets and investment banking arenas – seems surprisingly upbeat. It went through a rocky patch earlier in 2008, but the fact that its ability to win and execute deals is relatively undiminished has bucked most people up.
Neither has the switch in May to a global capital markets model, in which DCM and ECM are managed as one group, led to the kind of job cuts which some feared. "The GCM model has proved right for these times because funding has become a much more strategic discussion," said Soanes.
Credit where it is due
At Credit Suisse those in the capital markets teams are similarly upbeat – and they have much to be upbeat about. Described flatteringly by one UBS banker as "UBS without the US$40bn cock-up", CS is positioned as one of the great beneficiaries of the credit crunch.
Far from suffering disproportionately from the crisis – as many had predicted – the bank was well positioned. It had, for example, begun to pick its targets in leveraged finance more carefully than its rivals as the crisis approached, and therefore ended up less damaged.
It also reacted quicker than most of its peers when disaster struck, and made a virtue of not just marking down its underwater positions, but actually dumping assets. In this it was ruthless and unsentimental – getting rid of paper at previously unthinkable levels – and then watching those who held on either full to the gills with crippling levels of exposure or being forced to sell at near-distressed prices.
As a result, more than a year after the crisis broke, it can say that its strategy in the capital markets has not changed. "We want to be a top five player in the ECM league tables and aim to be consistently top three," said Marisa Drew, co-head of the global markets solutions group in EMEA and co-head of European leveraged finance origination.
At the time of writing, CS was meeting that ambition in Asia-Pacific – at number four in the Thomson Reuters ECM tables – but falling short in Europe and the US. But its European business is set for a significant boost: last week it launched deals totaling some €6bn, in the form of Commerzbank's capital raising, a privatisation of Polish energy group Enea and a rights issue for Natixis.
The bank puts a particular emphasis on IPOs, which Drew acknowledged to be a "lumpy" business. Such a strategy requires an ability to be opportunistic and adapt to which sectors are open, she said. "A month ago, Russia was hot and financials were not in favour. Now [after the US Treasury rescue of Fannie Mae and Freddie Mac] FIG has rallied. Africa comes and goes," Drew said.
The bank has a different strategy when it comes to DCM. The idea is not to be near the top of league tables but to emphasise profitability and strategic event-driven transactions.
Leveraged finance remains an area of focus. The bank is preparing (alongside Deutsche Bank and JPMorgan) to reopen the European high-yield bond market after a year-long hiatus, with a deal from Fresenius. The trade should arrive later this month and comes alongside a leveraged loan package. Drew said the bank has not been forced to scale back resources focused on leveraged finance and that CS has the same number of MDs dedicated to the product as it did before the crisis broke, and maintains a clear strategy to maintain a substantial presence in leveraged finance.
What has changed as a result of the credit crunch is that CS has – as one of the survivors – gained a new level of credibility with clients. "Given the market we are currently in, clients are looking to do business with banks that have stability, a strong capital base and solid management and therefore we are winning new clients and are on RFP lists that we might not have been on before," Drew said.
In the world of structured products, the bank is also performing well. Thibaut de Gaudemar, the other co-head of the global markets solutions group in EMEA and head of the equity-linked solutions group, said CS has had one of its best ever years in his area. "The unusual market environment which has made credit more difficult to access," combined with the extra volatility and growing hedging needs, has led to a boom in issuance, he said. "Transactions are at a size that was previously unheard of," he added.