UBS's Woes Run Deeper Than Just One Leader

(Bloomberg Opinion) -- A year ago, all was set fair for Switzerland's largest bank. The wealthy were getting richer and assets were appreciating, while many of UBS Group AG's European competitors were still figuring out what they wanted to be.

The firm's decision after the financial crisis to pivot away from the rapidly shrinking securities-trading business to focus on managing money for the wealthy, especially in Asia, looked to have been timed impeccably.

But Chief Executive Officer Sergio Ermotti and Chairman Axel Weber, who oversaw the transformation, may have become too comfortable. At least that's what the market is pointing to. The company lost a third of its market value last year, and gave up its crown as the most expensive of Europe's largest banks, based on a measure of their tangible book value, to HSBC Holdings Plc.

UBS's Woes Run Deeper Than Just One Leader

The board has intensified its search for a successor to Ermotti. The bank has sounded out former Bank of America Corp. investment banking chief Christian Meissner as a potential candidate, Bloomberg News reported last week.

It's easy to see why the board might want a new CEO – but investors have good reason to be wary. As shareholders of other big European banks have found out, changing leader is no silver bullet. Whoever takes over will to need to embark on revamping the bank's strategy.

For years, shareholders have been disappointed in UBS's promises to return money through buybacks and dividends. Ermotti blamed ever-growing capital demands by regulators for capping those handouts. True, Switzerland has continued to raise the bar even beyond the requirements set for global peers. But after salvaging UBS, it's been keen to avert another costly taxpayer-funded bailout. Those demands have now largely plateaued.

But so may the asset growth that has helped sustain revenue and propelled UBS into a firm overseeing $3.3 trillion of funds. In the seven years since Ermotti joined from UniCredit SpA, that figure has grown by a staggering 60 percent. It's hard to see that growth continuing. As central banks withdraw their economic stimulus and global geopolitical risks paralyze investors, any successor may need to view the growth opportunity differently to what it looked just a year ago.

Even as the first Swiss-based bank to establish a presence in the Asia Pacific region, UBS isn't immune to the impact on customers and its own business of global trade wars. After one of its wealth employees was asked to meet with Chinese officials in December, it asked staff to reconsider their travel plans to the country.

For any successor, the obvious first step would be to get a stronger grip on costs. In an interview with Bloomberg Markets magazine in October 2017, Ermotti predicted that UBS could do with 30 percent fewer staff over the coming decade as machines replace humans. Instead, headcount has been on a tear. Since bottoming out at the end of 2016, it's increased by 10 percent to the highest since 2008.

The same can't be said for net income – down since 2016 on a 12-month trailing basis. Though operating expenses have been clipped, they remain stubbornly high relative to peers: costs ate up 77 percent of income at UBS, compared with 58 percent at HSBC.

Here, the Swiss bank needs some more ambitious targets than the ones it has already. In late January 2018, in an apparently hastily cobbled together presentation, UBS said it expected its cost-income ratio to come down to no more than 75 percent. By October, amid investor pressure, it revised that goal to a lackluster 72 percent for 2021.

Any CEO appointed from outside would also need to contain disappointment among UBS’s top ranks. The bank has been weakened by management tumult and friction as Ermotti has remained in his post. The abrupt exit of veteran wealth management chief, Juerg Zeltner, in December 2017, led to a succession of appointments and a reorganization of the business. It's now run by Martin Blessing and Tom Naratil, both at one point seen as the internal front-runners to succeed Ermotti. Investment bank chief Andrea Orcel, credited for making a success of downsizing the unit, also quit unexpectedly in September, taking the CEO post at Banco Santander SA. The Italian had signaled he'd want a top job at some point.

With global growth set to slow in 2019 and central banks poised to shrink their balance sheets, the time is ripe for UBS to freshen up a strategy that had once served it so well. Replacing Ermotti would be a sign this process is underway – but the bank's woes run far deeper than any one person.

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.

©2019 Bloomberg L.P.