Archegos Blowup Claims Another Swiss Victim

For UBS Group AG, the world’s biggest wealth manager, a $774 million loss on one client may not have been material in what was otherwise a blockbuster first quarter. But the surprise hit from the implosion of Archegos Capital Management, revealed on Tuesday, raises deeper questions about the risk taking that underpins the firm’s growth in its investment bank and wealth businesses.

The Archegos charge didn’t lead to a collapse in UBS profit, nor did it cause investors to radically change how they view the company. Shares fell no more than 4% after the loss was announced. In the gray area of what constitutes a material event in a firm’s accounts, the loss probably didn’t meet the definition for requiring immediate disclosure.

Crucially, by revealing the hit only today — when the Swiss bank reported first-quarter income and profitability that still exceeded analyst estimates — Chief Executive Officer Ralph Hamers was able to portray the mishap as a one-off, unfortunate blunder that the bank can move past. He spent more time talking about the firm’s vapid new corporate goal, “Connecting people for a better world,” than on explaining what had gone wrong with Archegos. While investors may be tempted to shrug it off, the episode with Bill Hwang’s family office needs to be taken more seriously.

First, the size of the Archegos hit is a significant financial setback, leading to UBS’s first prime-broking loss since the financial crisis. It may appear less significant in a period when wealth clients and investment banking customers were trading at a record pace, but the charge knocked pretax income for the quarter down to $2.3 billion.

What’s more, as a Bank of America analyst notes, the writedown — which will rise to $860 million after a further hit in the second quarter — exceeds the bank’s credit-loss charges for the whole of 2020, the year the Covid-19 pandemic triggered the deepest recession in decades. That years of prudent UBS credit-risk management can be overshadowed by losses on a single customer is a painful reminder of the devastating impact of big trading bets gone awry.

UBS wasn’t not alone in being blindsided by Hwang’s highly concentrated stock wagers made with heavy borrowings from investment banks. The Archegos total return swaps backfired spectacularly last month, burning several peers, including Morgan Stanley, Nomura Holdings Inc. and UBS’s local rival Credit Suisse Group AG, which faces five times UBS’s losses. 

But the business of serving family offices and offering bespoke equity derivatives are at the core of UBS’s investment banking and its larger wealth-management operations. As I warned in January, when the bank reported a surge in derivatives income in the final months of 2020, structuring swaps is a lumpy business that can’t be counted on. Income from that activity jumped another 27% at UBS in the first quarter to $1.2 billion, accounting for more than half of its investment-bank operating income. How do you sustain this lucrative business without taking undue risk?

Hamers has pledged to review risk management across the prime broking and family office division, which offers some hope for better diligence in the future. The CEO, in the job since the autumn, says he doesn’t plan to scale back investment banking, which soaks up about one-third of the firm’s capital. Prime brokerage is crucial to building relationships with family offices, he notes. But Hamers has just started a strategic review of the bank.

The only details he would share are that the firm will focus on attractive growth markets and large pools of wealth in the U.S. and Asia. He’s also keen to improve efficiency at a bank not known for being lean, offering at least $1 billion of cost savings by 2023. But without new financial targets and a clear outline of where the firm intends to deploy capital, it’s hard to discern much from the new “better world” mantra than corporate buzzwords.

For now, investors (and regulators) would be better off pushing for more of an explanation on how a single-client event could hurt the giant Swiss bank as much as a pandemic.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2021 Bloomberg L.P.

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