Orcel’s hard sell
Running an investment bank is a well-paid but sometimes frustrating business. At UBS, investment bank boss Andrea Orcel has presided over several quarters of 20 percent-plus returns on equity, as rivals have barely managed half that. Yet in the quarter just ended, UBS’s broker-dealer business only squeezed out a 4.4 percent return.
Since Orcel’s first full year in 2013, UBS’s investment banking revenue is up a bit, even as rivals have experienced drops. Full-year return on equity in 2015 was just below 26 percent. Orcel’s background is in advisory, not trading where most of the performance has originated, but arguably his fresh eyes and attention to detail helped. UBS also has a better relationship with its regulators now than it did then.
If he deserves credit for the rise, what about the fall? Investment banking has two main drivers – trading activity and corporate clients’ willingness to do deals. UBS was reminded in the past quarter that it has little control over either. There were some discrete afflictions: losses on energy loans, the costs of the UK’s balance-sheet levy and restructuring charges. But it was the overall 10 percent top-line decline that did most of the damage.
Time for another strategic shift. UBS’s China exposure meant the recent slowdown hurt it especially. Equities trading revenue fell almost a fifth versus a slight aggregate rise on Wall Street on account of its skew towards structured products sold to its wealthiest private banking clients in Asia. Orcel wants more U.S. revenue to rebalance its business. But UBS’s U.S. advisory brand was hammered after the 2008 crisis as rainmakers decamped to boutiques. And all banks are trying to grow in more vanilla equities trading, given its relatively light capital treatment.
UBS has done this before and isn’t the only one that needs a new strategy. Corporate finance activity was tepid in January. The first quarter of the year, traditionally the strongest for investment banking, could mirror UBS’s fourth-quarter experience. If that’s the best that an investment bank chief can hope for, it could be a long year ahead. Alternative careers in more predictable businesses like commercial banking have rarely looked so appealing – and not just for Orcel.