Tuesday, October 10, 2017

"How UBS Became Home to Half the World’s Billionaires"

Simply, first rate.

From Bloomberg Markets, October 3, 2017:
The CEO of UBS, Sergio Ermotti, is a trader at heart. Yet the most recent chapter of his career begins with the investment banker overhauling an investment bank. It’s 2011, and he’s just been named interim chief executive officer of a Swiss bank that’s no longer quite so secretive, that’s still reeling from the financial crisis, and that’s been tarnished by a rogue trader’s $2.3 billion loss.

Ermotti quickly embarked on a Matterhorn-size strategic shift that downplayed the company’s investment banking and asset management efforts to focus on building the world’s largest wealth manager. The resulting stability and credibility has made UBS Group AG such a model that investors now value the bank at a premium to its European rivals, several of which have attempted to deploy versions of Ermotti’s playbook. Asked if there’s a limit to how big UBS can grow from an assets perspective, Ermotti says, “If I look at the size of some of our asset-management competitors, it doesn’t look like it.” In two recent interviews, Ermotti discussed his strategic vision, the role technology will play in shrinking the bank over the next decade, and a regulatory landscape so inhospitable that it’s like “they’re living on a different planet”—which could someday even mean the Swiss bank reconsiders its Swissness.

BLOOMBERG MARKETS Almost half the world’s billionaires bank with you. That’s a distinct set of clients. What have you learned from them?

SERGIO ERMOTTI It’s always fascinating to hear how they became so successful. When you look at billionaires, many of them share one characteristic: They were not born billionaires. I was in Asia recently, where I met a few, and they have quite impressive stories. It feels like the American dream, only it’s no longer just in America. The main lesson for me is that with passion, focus, vision, determination, you can do a lot.

BM Which trait most stands out?

SE You see a lot of passion for what they do. And the same level of focus. It’s quite clear that it’s not all about money. Of course some people care about that, but at the end of the day, they enjoy what they do.

BM How much time do you actually spend with clients?

SE Not as much as I would like. The most interesting discussions are actually when we are fortunate enough to bring them together. We organize events where our clients can get together. It’s also a way for them to foster a level of cooperation, of getting to know each other—which is important for business regardless of UBS being involved or not.

BM You’re like Tinder?

SE At these events we are a kind of sophisticated speed-­dating organizer, sure. It adds value for our clients. Take Art Basel. The idea is that people attend because they share a common interest, a passion. And while attending the events, maybe they start to talk about other issues or opportunities.

BM What did you think of UBS before you got here?

SE I thought it was an incredible franchise with almost 150 years of history that had survived a dramatic moment. My predecessors had stabilized things, but it was not clear yet what the path was going to look like going forward. I’ve always been impressed by the fact that, as bad as things got here, only 2 percent of clients closed their accounts. I figured the franchise and the quality of the people who are able to retain the clients during such a crisis must be extremely high. My view was, I want to be a part of this.

BM How would you describe your business today?

SE We are the undisputed global leader in wealth management. We think that this is a huge advantage. It’s a very fragmented market still. And if I look at our position and the growth expectations of wealth creation, which is expected to be twice as high as GDP, we should stay focused on doing this. Sell-side analysts, rating agencies, and the media still consider us an investment bank. I find it totally ridiculous. If you look at where our business comes from, we are basically the world’s most expensive investment bank and its cheapest asset manager.

BM What advice did you get when you arrived here?

SE Some competitors were telling me, “Shut down the investment bank; we’ll serve you.” They wanted to grab flows and build out their business. People also told me to sell Wealth Management Americas. My popularity would have soared, especially in Switzerland; UBS wouldn’t be where it is today; and I doubt I’d still be here. That was a defining moment—to say, These are businesses we can turn around. It was a good reminder that the consensus is not necessarily the right thing to do.

BM Was there a company, maybe even outside your industry, that you looked to for inspiration?

SE Not for strategy. But when I joined, I said I wanted UBS to be the Apple or the IBM of the financial-services industry: from glory, to near-death, and then back to glory.
“What I see in the financial-services industry is people still struggling with their business model”

BM You were briefly interim CEO while the board figured out who would be the best person for the job. How did you approach that role?

SE We were having a difficult time. Because after the big crisis was over, we had the rogue trader incident that was undermining the credibility of our ­recovery. It was a shock internally and externally. My No. 1 question was, Will I have the power to manage the bank? The most important issue was defining our strategy. I knew we had pockets of excellence and that we needed to focus our investments and growth in certain areas. We were starting to develop an understanding of where we may go, and we needed to give our investors and employees a vision for that direction, even if it wasn’t the final direction. I thought if we stayed silent and defensive, we were going to lose talented people and clients. We needed to find a model that was more stable and credible, and that also created value for our shareholders.

BM Was there ever a moment you thought, Maybe getting the CEO job isn’t such a good idea?
SE Never.

BM What gave you that confidence?

SE The confidence was progressive. I spoke with my colleagues and said, “We can regain control of our destiny.” Previously, UBS had been reactive. This was the first moment when we said, “Maybe our strategy can be accelerated, and we’re the ones dictating the acceleration.” We’re not waiting for someone else—a regulator or a shareholder—to tell us what to do. We were top-of-the-class in many areas of investment banking, but we don’t want to compete across the board. We are not a one-stop shop. We want to be seen as a focused investment bank that is very competitive where we choose to compete. My investment banking background—17 years at Merrill Lynch, five years at UniCredit—gave me confidence, and we decided to focus the acceleration into a model I thought could work. After the strategy announcement, people commented that it was like decommissioning a nuclear plant. But I knew it was possible.

BM How do you get everybody else in the organization, or at least the key people, to follow you?

SE That’s a very important point. I wouldn’t have had the confidence if our people and our clients didn’t believe. I think I had their full confidence, and that gave us a tail wind. When you start to get shareholders, clients, employees, rating agencies, and everybody converging, and then your competitors bad-mouth you, you know you did the right thing.

BM Imitation is the sincerest form of flattery. Many of your competitors have since retooled their own strategies to look more like yours. How would you have changed your approach?

SE I wouldn’t have done things any differently today, and I am totally convinced about that. We may be an example for some banks, but I don’t think we can be an example for all banks, because we are quite special. Every bank has to find its own DNA. I knew that we needed to show every quarter—quarter by quarter, no matter the market conditions—that we were serious about our new business model. Of course, we are not printing as much pretax profit and revenue growth, but if I look at return on allocated capital, I don’t believe that we are losing anything, actually. We are protecting our shareholders by not doing businesses that are clearly dilutive and not value-accretive.

BM Is there a limit to how big UBS can grow from an assets perspective?

SE If I look at the size of some of our asset-management competitors, it doesn’t look like it.

BM Speaking of which, your asset-management business is one area in which investors might still like to see better results. Is M&A the way forward?

SE We’d also like to see better results. We’ve exited certain businesses that weren’t adding value or differentiating us. You always need to understand, What’s the trajectory? Everything is open; never say never about anything nowadays. And it’s always our duty to look at any growth opportunity, organic or not. Having said that, the valuation doesn’t indicate that a bank can be a buyer of an asset-management business without being totally wiped out in terms of capital consumption. We are very happy. Our asset management is a low-capital-absorbing business and creates value for us.

BM So it’s less important to compete with the BlackRocks and the Vanguards of the world?

SE No, we can’t compete. It’s like the investment bank. We are competing with the so-called top in all the businesses where we choose to compete. We have to define the competition, and we have to define how we compete by our own targets.

BM So what’s your asset management play going to look like?

SE More focused, for sure. Already today we’re not small. We have around $700 billion of assets under management, more than a third of which—$250 billion—is passive. It’s true, passive is a new trend. We believe that the days of active are not over. It’s changing though. You need to be very good and focus on that. We are playing more the David than the Goliath. I know I can’t go out and compete on size with Vanguard or BlackRock on ETFs. But that’s not what we want to do. We want to have ETFs that are designed to serve certain characteristics....

HT: Naked Capitalism