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Dutch courage

20 Oct 2020 By Liam Proud

Ralph Hamers, who starts as UBS chief executive on Nov. 1, inherits a much better bank than his predecessor Sergio Ermotti did in 2011. Paradoxically, that makes it harder for the Dutchman to distinguish himself.

Ermotti in 2012 announced a major restructuring to focus the $44 billion Swiss group on wealth management rather than risky trading businesses. It worked: Investment banking now accounts for one-third of risk-weighted assets, compared with three-quarters in 2011. UBS trades at 82% of tangible book value – a premium to Credit Suisse’s 55% – and churned out an encouraging 12.9% return on tangible equity in the first nine months of 2020.

Hamers’s task is different. He has limited long-term growth opportunities given low interest rates. Slashing UBS’s roughly $23 billion annual cost base is therefore a necessity. Operating expenses will consume 78% of income next year, using Refinitiv median estimates – higher than Credit Suisse’s 76% and Morgan Stanley’s 72%.

UBS’s recent history suggests Ermotti has already found the obvious savings. In 2012, every $1 of annual cuts came with 54 cents of one-off restructuring charges, according to Barclays analysts. That ratio rose cumulatively to 88 cents by 2015 and $1.01 by 2017. The lesson is that future cuts will incur large upfront costs.

Hamers will have to get creative. One option is selling lower-margin units like U.S. wealth management, which is closer to a brokerage business and doesn’t necessarily fit with the rest of UBS. And the investment bank, currently enjoying a volatility-induced boost, will require attention. Hamers, who earned a reputation as a savvy digital thinker at his old Dutch charge ING, could replace more of the division’s 5,000-odd staff with algorithms, particularly the spreadsheet crunching junior bankers. Cost-sharing agreements with rival investment banks could also save money without the hassle of a merger.

Ultimately, though, big savings may require big deals. A union with Deutsche Bank, after it has completed its own restructuring, is one option. On that front, Ermotti left Hamers a gift: UBS’s market value is broadly the same as in late 2011, while rivals have slumped. It could therefore absorb most European suitors, rather than being a junior merger partner. That puts Hamers in the driving seat for bank consolidation – even if it’s ultimately Ermotti’s achievement.

 

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