UBS sharpens its focus… while Hong Kong’s regulator draws its knife
Competitors have been quick to delight in the travails of UBS’s Asian investment bank, notably its decline in the league tables and a revolving door at senior management level. A ban imposed by Hong Kong’s regulator is the latest stick with which to beat the Swiss bank. But UBS’s regional leadership remains bullish – not least thanks to the power of its private bank.
It is almost impossible to rattle David Chin, head of corporate client solutions in Asia Pacific for UBS.
The bank has had a rough ride in Asia over the last few years, written off on more than one occasion by rivals as a real force in Asian investment banking because of numerous changes in senior management and a slide down the league tables. Yet no matter what Asiamoney asks, Chin remains unflappable.
Why has UBS lost ground to Credit Suisse, its local rival, in a region that both have made a priority? Does the investment bank rely too much on wealth management for business? How much has UBS been damaged by its role as a sponsor on a 2009 IPO for China Forestry, which later went into liquidation?
These questions are not just relevant to the regional business. UBS’s performance in Asia increasingly impacts its global numbers. It’s no wonder one of UBS’s top global executives recently told Asiamoney’s sister publication, Euromoney: “The truth is, we need Asia to be performing well.”
The question is, can the current generation of leaders deliver that performance?
Among the threats facing UBS’s business in Asia, the most talked about is regulatory risk.
In March, just as Asiamoney was preparing to go to press, the Swiss bank revealed that it faced the possibility of being suspended for 18 months from its role as a sponsor on Hong Kong IPOs.
Hong Kong sponsors have two main jobs: making sure their clients know exactly what is expected of them in terms of transparency, disclosure timing and honesty, and informing Hong Kong’s stock exchange whenever the sponsor becomes aware that the IPO candidate has not entirely complied with the rules.
In effect, sponsors provide the first due diligence on a listing, working closely enough with a company that they can spot sins of both omission and commission.
There appeared little risk to Hong Kong IPO sponsors until May 2016, when the Securities and Futures Commission (SFC) picked swashbuckler Thomas Atkinson as its new head of enforcement.
Atkinson has given the SFC more teeth, putting together specialist teams to go after intermediaries, among other things, and taking on tough cases.
|David Chin, UBS
In January 2017, the SFC sued UBS and Standard Chartered over their roles as sponsors of China Forestry’s HK$1.6 billion ($210 million) IPO in 2009.
China Forestry’s listing was later suspended and its auditor uncovered accounting irregularities; the company is now being liquidated.
The SFC dropped the suit against the sponsors in October, saying its legal options were probably time-barred, according to press reports at the time. But in its 2017 annual report, published in March this year, and buried on page 383 (as point number seven, out of seven, in the provisions and contingent liabilities section, behind third-placed Bernie Madoff), UBS said the regulator had issued a ‘decision notice’ in relation to a HK$119 million fine and an 18-month suspension.
It is not yet clear whether the SFC changed its mind about its legal options with regards to China Forestry, or is instead planning to punish UBS for another deal. Atkinson has publicly stated that 15 banks are under review for shoddy sponsor work.
UBS has already taken a step back from sponsoring Hong Kong listings, dropping from 10 sponsored deals in 2014 to just two in each of the last two years. This is partly because increasing regulatory oversight has raised the bank’s expectation as to what sponsoring a deal should pay, Chin told Asiamoney before the regulatory action was announced.
“When we choose to be the sponsor, it doesn’t cause any issue at all, but we do take on that responsibility very carefully,” he says. “That’s partly because the SFC is taking a very harsh view and partly because they have raised the bar and we know we need to put in a lot of resources to meet their requirements. Unless it is a deal where we’ll be rewarded properly, we will tend to not take on the sponsor role.”
That choice may soon be taken out of the bank’s hands.
It is worth noting that the SFC has not officially announced its decision. The decision notice sent to UBS will be followed by an appeal at the Securities and Futures Appeals Tribunal. A date for the hearing has still not been fixed, says a source with knowledge of the matter.
The final hearing is likely to happen in the fourth quarter of 2018, with the final decision made in the first calendar quarter of 2019, says another source.
How much impact could this have on UBS? One rival says it will have a “practical, chilling effect on their business” even before the suspension has been confirmed. But others were not so sure.
“It is a rap on the knuckles for UBS and serves a signalling purpose to others,” says a Singapore-based bank analyst. “UBS can still be an underwriter … so it is not clear how much impact this will have on its business.”
This is a point echoed internally. UBS can still be mandated as a global coordinator on Hong Kong listings, as indeed it was on IPOs last year for Yixin Group and Foxconn Interconnect Technology – neither of which it sponsored – and which raised $868 million and $393 million respectively. The bank can also take prime position on deals in other Asian equity capital markets.
“Is it helpful? No, of course not,” admits a source at the bank. “It gives a field day to our rivals to say we’re locked out of the IPO market, even though it’s not true. We continue to do all other ECM business. The sponsorship business is just a sliver of our business, although arguably it’s an important sliver.”
UBS can take some comfort from the fact that the regulatory risk in Hong Kong IPOs is now fairly well spread out between investment banks in the region. But will UBS be just the first of many banks penalized by the regulator – or will its tough treatment allow the SFC to back away from wide-scale suspensions that could actually harm sponsor quality in the short term?
These questions seem likely to plague UBS bankers for much of the remaining year, forcing them to prove their business is not being hurt by the SFC’s clampdown. But even as they try their best to act as if it’s business as usual, their rivals are nipping at their heels.
Chin returned to UBS in September 2017 following a two-year break in academia as a visiting fellow at his alma mater, Selwyn College, Cambridge.
Until then, Chin had been a UBS-lifer, working his way up from an associate position at SG Warburg to take a number of big jobs in Asia Pacific, including head of the financial institutions group, head of mergers and acquisitions, co-head of Asia investment banking and, finally, sole head of Asia corporate client solutions in Asia.
He added a feather in his cap on his return, expanding his role from Asia to all of Asia Pacific.
‘Corporate client solutions’ sounds like classic management-speak, but at UBS it has a fairly clear meaning: it covers debt capital markets, equity capital markets and mergers and acquisitions, as well as all primary and advisory business. The Swiss bank says on its website: “What other firms call deals, we call solutions”.
Since Asiamoney remains resolutely old-fashioned, for the remainder of this article we’ll just call them deals, too. CCS is one half of the investment bank alongside investor client services, a roundabout way of referring to equities and the other trading businesses.
CCS appeared to struggle last year. The biggest decline was in mergers and acquisitions, where its Asia Pacific ex-Japan volumes fell from $152 million in 2016 to $97 million in 2017. This is a bigger contraction than the wider market, but as China’s government clamped down on a rush of outbound acquisitions, almost every big bank had to endure a slowdown in M&A revenues.
UBS is also looking to address the relative underperformance of its capital markets business, announcing in March that it would combine its ECM and DCM operations in Asia Pacific. Chin says the merger would provide synergies, as well as improving UBS’s ability to allocate resources more efficiently.
As long as we can be focused and disciplined – because we can’t chase after every deal – we can win. That’s the mentality here - David Chin
More compelling is the comparison to Credit Suisse, which managed an extraordinary year in 2017, breaking its own revenue records.
“It’s interesting to compare them, since they both have similar strengths,” says the head of DCM at a large bank. “Credit Suisse has decided it is not going to pitch for every bond, and it is doing a good job. I sometimes look over my shoulder and think about Credit Suisse. I don’t do the same with UBS.”
The full-year numbers demonstrate the zig and zag of the two banks. In 2012, UBS earned more from investment banking in Asia ex-Japan than any other bank, generating $285 million in fee revenues, according to Dealogic. Credit Suisse, which brought in $247 million, had an impressive business, but it was clear that UBS was the leading Swiss bank in the region. The two now appear to have reversed roles.
Credit Suisse brought in $396 million from its Asian investment banking division in 2017, marking its most successful year yet after a whopping 57% increase on 2016. UBS, by contrast, generated $267 million of Asian investment banking revenues last year.
Even more striking are the Asia Pacific ex-Japan numbers, which include an Australian business in which UBS has long been dominant.
In this wider arena, UBS has always had bragging rights over its Swiss rival. But in 2017, Credit Suisse overtook UBS for the first time. Credit Suisse generated $458 million in Asia Pacific ex-Japan fee revenues in 2017, compared with $384 million for UBS, according to Dealogic data.
Figures from Dealogic are generally good, allowing journalists and bankers to assess how banks are performing. But they are not a perfect measure. Chin argues that UBS’s internal numbers show revenue growth last year, whether you look at Asia, Asia ex-Japan, or Asia Pacific ex-Japan. (The bank does not break down investment banking revenues by region.)
He does admit, however, that Credit Suisse may have pipped UBS in 2017.
“That’s probably true, but I can explain it,” he says. “Their one key strength in investment banking in Asia over the years is their ability to list tech companies in the US. That was the dominant theme for the large part of 2017. Congratulations to them. They rode that train last year.”
He adds, with more than a hint of friendly rivalry: “There’s a reason they’ve been behind us all of the years, but had one year of success. We hope it will revert to the norm this year.”
Asia’s performance is closely watched at the UBS headquarters in Zurich because of the impact on the global numbers. For example, in a strong year for Asian markets in 2015, UBS thrived; in 2016, a weaker year for the region, its group numbers disappointed.
For the first nine months of 2017, in better Asian markets, UBS’s Asian net profits were up nearly 40% on the same period for 2016; group net profits were up around 30%. That performance was driven by a record year for Asian wealth management.
With the regulatory issues acknowledged, and competition from Credit Suisse hand-waved away, Chin tells Asiamoney about his optimism — albeit with characteristic caution — for the Asian business in the coming years. Combined with interviews with some of the firm’s most senior bankers in the region, as well as with rivals, Asiamoney gets a good sense of where the bank is going.
UBS has a trump card that few rivals can rely on so well: an enormous private banking arm that can power a surge of investment banking deals.
UBS’s wealth management unit had invested assets of around SFr373 billion ($395 billion) in Asia including Japan at the end of last year, up 27% from the year before. The rapid growth in its Asian assets shows no sign of slowing down.
UBS added SFr10 billion of net new money in the fourth quarter of 2017, an increase of nearly 12% over the previous quarter. The majority of net new asset growth in the region is coming from existing clients, but more than a quarter is from new clients, showing the bank is still finding room to grow.
|Edmund Koh, UBS|
“There are a few things that put UBS at a clear advantage,” Edmund Koh, UBS’s head of wealth management in Asia Pacific, tells Asiamoney. “The brand itself is synonymous with wealth management; it’s very strong. The other advantage is scale. Because of our size, we are able to bank some of the biggest clients in the world without them spreading their wealth between too many different players. When they consolidate, they consolidate with us. That scale also means we can attract some of the top talent to work for us.”
Ravi Raju, global head of ultra-high net-worth clients in Asia, is a good example of such top talent. Raju was Deutsche Bank’s most senior private banking executive in Asia; when he was poached by UBS at the end of 2016, the German bank retaliated by dropping UBS from its share offering.
On the issue of assets, some of the competition may see things differently to Koh.
“Net new assets is a horseshit metric,” grumbles a senior banker at a rival firm. “They have been incredibly aggressive in wealth management. They’re basically buying clients by lending at a rate which just doesn’t appear profitable to us.”
But Koh rejects the idea that UBS is winning clients by providing cheap margin loans. He says that his loan-to-invested assets ratio is only around 11%, compared to an average for his rivals that he projects at 20%. When asked whether new asset growth is relying more on lending than legacy assets, he delves further into the numbers.
In 2016, out of the SFr293 billion of invested assets that UBS held in Asia, only SFr36 billion came from loans, Koh says. In 2017, out of SFr373 billion of invested assets in the region, only SFr42 billion were loans. That means that about 7.5% of the bank’s asset growth in the region has come from lending, bringing down the average.
“We still haven’t really turbo-charged on the loans front,” he says.
One hurdle to making wealth management and investment banking work well together — particularly when it comes to referring clients between divisions — is the clash of cultures between the two teams.
Investment bankers have a reputation for being brash, obsessed with numbers and focused on short-term opportunities. Private bankers, by contrast, are often portrayed as smooth-talking sophisticates who can recommend the best restaurants in Cap d’Antibes.
These characterizations break down under scrutiny, especially given the clear importance of relationship management for investment bankers across Asia. But there are cultural differences, driven in part by the fact that investment bankers tend to enjoy better pay – and suffer longer hours. At a firm like UBS, which is so defined by its private bank, how can the investment bank and the wealth management division work together?
One way is to embrace the difference. The wealth management arm has so much firepower that some internal teams treat it as a client rather than a partner.
“UBS Wealth Management is our biggest client,” says Taichi Takahashi, UBS’s head of equities in Asia Pacific. “We pay a great deal of attention to their CIO’s view when pitching solutions. We treat them as an internal colleague but more and more as a client.”
The other is to break down barriers between the divisions by forcing junior bankers and desk heads alike to talk on a frequent basis. This is a long-term struggle, forcing some difficult conversations about how revenues are shared between teams. But it has been working at UBS for a few years, according to Koh.
“It’s so regular in the sense that we don’t need regular meetings,” he says of collaboration between the two units. “It is always just a phone call away. The collaboration is very much part of the business now rather than being something that is expected to be done through committee meetings.
“It started maybe two years ago. That was when things became more intuitive rather than getting bogged down with people worrying about exactly how much they get paid for business. It now goes into a central pot and we worry about the details later.”
For an example of how this is working, Chin points to Cromwell Real Estate Investment Trust, a €556 million IPO that closed just two months after he returned to the bank. A large chunk of the distribution for the deal went through UBS’s wealth management arm, helping to bolster a transaction that was pulled two months earlier.
But much of the value of the relationship is away from public deals such as this. Chin points to pre-IPO placements and structured equity deals, including share-backed financing, as being among those transactions missing from the Dealogic data.
Indeed, if UBS has managed to increase revenues across its business despite the Dealogic numbers showing a decline, it’s a fair assumption that the difference is being made up by those private deals that fit so well with the wealth management division.
“We are originating investment banking deals for their client base,” says Chin. “It’s not just IPOs or M&A — it’s bonds, private financing, pre-IPO funding, the full product suite.”
In terms of specific examples of deals that have been referred from the private bank to the investment bank – for example if a family-owned business decides to go public – examples were impossible to come by, either from UBS or its rivals.
Although distributing deals through the private bank offers a huge benefit to investment bankers, some rivals expressed scepticism the private bank could make much difference in origination.
We have a lot of opportunities in emerging markets, but the absolute scale in China is significantly different - Taichi Takahashi
The strength of the wealth management business does, however, make Asiamoney wonder about the balance of power between the two divisions.
The same banker who complained about net new assets puts it plainly just days before the meeting with UBS: “The private bank is without a doubt the dog and the investment bank is the tail,” he said. “You need an investment bank to develop bespoke solutions. That’s the next stage of wealth management.”
Does the CCS division exist primarily to come up with these bespoke solutions for the private bank?
It would make sense. Investment banking is hyper-competitive, even more so over the last few years as Chinese securities houses have muscled in. Private banking is a much harder business to crack, although some of those same upstarts are trying. But Koh rejects the idea that either side is in the driver’s seat.
“Our clients need a total solution from us,” he says. “It would be very wrong to think that the investment bank exists for the wealth management division. That’s not the plan.”
Chin, for his part, speaks about CCS and wealth management as being distinct, albeit mutually supportive, divisions. But he is clear about the boost a strong wealth management franchise gives to his own bankers, especially in markets where UBS’s investment bank has been far from dominant in the past.
“Our wealth management presence is crucial,” he says. “Southeast Asia is very strong for our wealth management business, for example. We can do a virtual joint venture, where we support their clients with investment banking products and outsource a lot of the day-to-day coverage to them. That is a great boost for us in southeast Asia.”
Asiamoney takes the point. UBS has a clear advantage over almost all of its rivals thanks to its bulky private bank, while Chin, Koh and Takahashi all say the right things when explaining how they work together.
But getting investment bankers and private bankers to cooperate is only one part of the equation UBS needs to show it has solved.
Where can UBS go from here? The answer to that question depends as much on what the bank doesn’t do as what it does. It needs to push ahead with its appeal of the sponsor suspension and make sure the move does not hurt the wider ECM business.
It needs to avoid the temptation to spread itself too thin, something Chin is clearly aware of. It also needs to keep its staff reasonably stable, unlike in recent years.
The turnover includes changes at the very top. Matthew Hanning, head of CCS in Asia Pacific, left in June 2016. Saurabh Beniwal and Joseph Chee, co-heads of CCS in Asia, have both left since then. Sam Kendall, Hanning’s replacement, moved to New York to run ECM globally for UBS; he was replaced by Chin.
There were changes near the top, too.
Paul Au and Patrick Liu, co-heads of the Asia debt financing group, left last November, replaced by Gaetano Bassolino. Alison Harding-Jones, head of M&A in Asia Pacific, left to join Citi in London, replaced by Greg Peirce and Pei Shen Chou, and more recently by Peirce on his own.
Damien Brosnan, co-head of ECM solutions, left the bank at the end of 2016; Andrea Casati was brought in as partial cover.
Some rival bankers snipe about these changes. The argument, suggested by one, that UBS is replacing local talent with too many European bankers does not pass the smell test – even ignoring the idea that the best person should get the job, a similar accusation could be levelled at many banks – but it is hard to ignore the criticism that UBS has gone through too many changes in the last few years.
In this sense, Chin’s hire was a smart move by Andrea Orcel, the global investment banking head.
Chin had worked at UBS for more than three decades before he quit in 2015. He had deep relationships with many of UBS’s longest-serving bankers, not to mention its key clients, and he was known to many on the ground who had become too used to being thrown into the unknown.
One former boss says Chin’s return will have been a boost to morale.
“He’s not a great leader of men, but he’s very solid technically,” the banker says. “He’s got a strong FIG background, very impressive product knowledge. He knows what he’s doing.”
UBS has made other hires since Chin’s return. Catherine Cai, Citi’s head of China investment banking, was brought in last November, becoming executive vice-chairman of the Asia Pacific investment bank. “That was the big one,” says a product specialist at UBS.
Among other recent hires are Aidan Allen, an ex-UBS banker who returned as co-head of CCS for Australia and New Zealand in August, and Byungil Lim, a former Credit Suisse banker who became Korea country head. Harry Egger was made India country head in an internal promotion.
Chin says that the team is now almost as strong as it needs to be to win, although he admits a few tweaks may be required here and there.
UBS can now focus on wider changes, he says, particularly the push to take a majority stake in UBS Securities, its Chinese securities joint venture. This is an important move for a bank that still sees China and Australia as its home markets in the region.
The main rationale of the move is economic. UBS already exercises management control of the joint venture and clearly has more reputational risk on the line than its four local partners.
Since it owns just less than 25%, however, the Swiss bank only gets a minority of the profits. That may have been acceptable when minority control was the only option, but now China has opened the gates to foreign firms taking majority ownership of securities joint ventures — HSBC Qianhai Securities remains the only one so far — it is a problem that needs addressing.
“China is one of the most important initiatives for us as we continue to grow our franchise,” says Takahashi. “We have a lot of opportunities in emerging markets, but the absolute scale in China is significantly different. We already have a strong position that we have built over many years, with the stake in UBS Securities and having the first QFII [Qualified Foreign Institutional Investor] quota. We want to make sure we stay ahead of everyone else.”
UBS is betting much of its success on its China franchise, but that bet has already paid off many times over for the Swiss bank.
The competition for Chinese fee revenues gets harder and harder every year, but Chin is confident UBS can make the most of it.
With his team in place, the game of musical chairs apparently over, and an open line to wealth management available whenever he needs it, Chin returns to a familiar cautious optimism when describing the bank’s prospects.
“The culture has not changed much since I was last here, but the market has changed,” he says.
“There’s more competition from Chinese banks. We need to serve our Chinese clients in a more sophisticated way, because they’re now moving from doing IPOs to cross-border M&A. We need to adapt to these changes to suit our strength, but overall the culture, the strength, the brand is still pretty much there. As long as we can be focused and disciplined – because we can’t chase after every deal – we can win. That’s the mentality here.”