UBS INVESTMENT BANK CHIEF: 'There is a severe dislocation and change in the industry'
It referred to the bank's 2012 decision to drastically slash its staff, specifically in the fixed-income-trading department.
These days, though, everyone seems to be "doing a UBS," and the bank is being held up as an example of Wall Street's leaner, smarter future.
Not that it isn't also seeing the same brutal conditions all banks face right now.
"The current environment is as challenging as it has been for 25 years, outside of the 2008 to 2009 period," says Andrea Orcel, president of UBS' investment bank.
"There is a severe dislocation and change in the industry," he said in an interview with Business Insider.
Bank revenues are being hit by poor trading results and low client activity. Barely a week goes by without fresh news of job cuts at a top investment bank.
But for Orcel, and his slimmed-down investment bank, this presents an opportunity.
"I tell the team here that it is like a Formula One race," Orcel said. "When we're in the dry, and everyone has the same tires, and it is a circular track, the most powerful car usually wins. Right now, we're in the wet, we're on a challenging racetrack, and so the size of the engine is less relevant. It is all about how you drive the car. It is all about innovation and execution."
UBS, it should be noted, is a global partner of Formula One.
Engine change
The bank took the decision a few years ago to swap horsepower for improved handling. It announced large-scale job cuts in October 2012. It slashed assets in the fixed-income-trading business, pulling out of more esoteric areas of the business that sucked up capital.
The three and a half years since that move have not been kind to Wall Street. Across the street, revenues have fallen year on year on year. In fixed income, currencies, and commodities, they dropped from $108 billion to an estimated $80 billion in 2015, according to Morgan Stanley research.
In that time, the investment bank has been transformed into a smaller, and more profitable, unit.
Total headcount at the end of 2015 was 5,243, down from 15,866 at the end of 2012. Total assets are down from 672.3 billion Swiss francs ($678.6 billion at current exchange rates) to 253.5 billion Swiss francs.
And the bank is delivering industry-beating returns. It reported a pre-tax profit of 1.9 billion Swiss francs for 2015, worth a return on equity of 25.9%.
Now other banks are coming around to UBS' way of thinking. Credit Suisse, Barclays and Deutsche Bank have all announced dramatic job cuts in recent months.
"The one bank I really respect is UBS," the head of a US investment bank told Business Insider when discussing retrenchment by European banks. "They were early. And now the business is doing well."
An opportunity amid the chaos
The decision to move early has put UBS in a position where it can try and exploit the weakness at other banks. It is looking to hire, just as others are looking to fire, and it is investing in businesses that are currently unfashionable, like fixed income.
Then there is the traditional investment-banking business, which provides advice on raising equity and debt and mergers and acquisitions. UBS ranked ninth globally by investment-banking fees in 2015, according to Dealogic, with $1.9 billion in fees.
UBS is hiring there too. Orcel said:
- "The business in Asia is important. We've committed to China and Australia, and we are looking around for senior bankers who can move the business forward."
- "In Europe, we've made a number of quality hires, and those people have bedded down. We're still looking to increase numbers across the region, but will be patient and selective - looking for the right fit for the role and our business."
- "In the US, we need to catch up. We're strong in selected areas where we have chosen to focus. We're now looking to build out our presence in others, like consumer and retail and industrials. It's a self-financed effort, but one that we are accelerating."
The jewel in the crown at UBS' investment bank has always been the equities division. The business generated 4 billion Swiss francs in revenue in 2015, up from 3.7 billion Swiss francs. It is also a business that is getting more and more competitive, as rival banks pare back in fixed income and look to invest in equities, where industry revenues have been trending upward.
"Our equities business is a top-three player and a significant contributor to the bottom line of our business, so we have, and continue to, invest across the board, particularly in the US, to further strengthen our offering," Orcel said.
"We also know the importance of remaining focused if we want to retain that level of dominance, as it is an attractive market for a number of our peers."
There are always risks involved in trying to take market share while others are struggling. Banks often see a light at the end of tunnel, believing it to be an opportunity, only to find out it is an oncoming vehicle. For UBS, it will be discipline and handling in difficult conditions that decide the investment bank's fate.