The Wall St.Journal 24Feb2020

B10| Monday, February 24, 2020 ** THE WALL STREET JOURNAL.

UBS’s

Retail

Banker for

Billionaires

Incoming CEO has a

glaring gap in experience

UBS revenue by business

Source: the company

Note: Excludes corporate center

$35

0

5

10

15

20

25

30

billion

2016 ’17 ’18 ’19

Global wealth

management

Investment

bank

Personal and

corporate bank

Asset

management

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Share-price and index performance

since Dropbox’s IPO

Source: FactSet

60

–40

–20

0

20

40

%

2018 ’19 ’20

Dropbox

Nasdaq

Wealth management is notably absent from Ralph Hamers’s resumé.

GEERT VANDEN WIJNGAERT/BLOOMBERG NEWS

month added Switzerland to

its watch list of potential cur-

rency manipulators.

The franc is nearly 7.5% be-

low its fair value to the dollar,

similar to the Chinese yuan,

according to Steven Eng-

lander, head of global G10 FX

research and North America

macro strategy at Standard

Chartered.

A strong franc is a problem

for the SNB because it makes

imports cheaper and lowers

inflation, which the central

bank has been trying to stoke

with some of the lowest inter-

est rates in the world. How-

ever, a weaker franc makes ex-

ports cheaper to the U.S., its

second-biggest market. That

risks attracting the ire of

President Trump, who has

been vocal in his views that

the strength of the dollar puts

the U.S. at an unfair disadvan-

tage.

Washington judges cur-

rency manipulation on three

criteria: the size of a country’s

trade surplus with the U.S.,

the size of its overall current

account surplus and how

much it has spent on currency

intervention. The Treasury de-

partment has said Switzerland

met the first two criteria.

Switzerland might not have

a lot of wiggle room before it

meets the third criteria. Inves-

tors pushed the franc higher

after the Treasury’s report,

speculating the SNB might be

more hesitant to keep its cur-

rencyatbay.

The main proxy for inter-

francs in their deposits.

Up until mid-February,

these sight deposits grew by

5.5 billion francs ($5.72

billion).

The U.S. rule is that a coun-

try shouldn’t spend more than

2% of GDP on currency inter-

vention; with Swiss GDP this

year forecast to be about 700

billion francs, that suggests it

can spend up to 14 billion

francs on holding back its cur-

rency. Simple math suggests it

might be able to spend less

than 9 billion francs over the

rest of 2020 before crossing

the Treasury’s line in the

sand.

The SNB appeared to

launch a big intervention last

summer: Sight deposits rose

by 13.5 billion francs between

to the hype implied by its private

valuation—$10 billion, in this case.

But Dropbox and cloud peerBox

have also both had to fight against

the notion that their businesses

are rooted in cloud-based, data-

storage services that have long

since become commoditized.

The two are among the lowest-

valued companies in the cloud-

software category, with Dropbox

trading at barely four times for-

ward sales before Thursday’s re-

sults. Box, at around three times

sales, has drawn the interest of ac-

tivist investorStarboard Value.

Analyst Zane Chrane of Bernstein

openly wondered Friday if Drop-

box was also facing activist pres-

sure given the buyback and ag-

gressiveness of its profitability

target shift.

Time will tell, but Dropbox now

operates in an environment where

even high-growth companies are

afforded only so much leeway in

betting everything on their

potential.

Adding some cash return for

shareholders is a good way to

stand out from the pack.

For Dropbox, business as usual

wasn’t an appealing option.

—Dan Gallagher

UBS, the world’s largest wealth
manager, has appointed a new chief
executive who has no wealth-man-
agement experience.
Late Wednesday night, the Swiss
bank unexpectedly announced Ralph
Hamers would leave his post atING
to take over as chief executive in
late autumn.
After a 15-month search, UBS
Chairman Axel Weber concluded
that Mr. Hamers was the man for
the job. The Dutchman has run a
large, systemically important bank
and has strong digital skills.
Messrs. Weber and Hamers
worked for years together at the
European Banking Group and the
Institute of International Finance.
The UBS chairman assured inves-
tors Mr. Hamers will earn his “UBS
passport” during the handover and
“this is not about changing strategy,
this is about changing CEOs.”
But the new boss’s inexperience
in wealth management is a glaring
gap. Mr. Hamers has successfully
reshaped ING, a bank with a $42
billion market capitalization. He de-
livered shareholders a total return
of nearly 43% over his more than
six-year tenure as CEO—impressive
when compared with the break-
even return for the average Euro-
pean bank.
However, managing the money of
the world’s millionaires and billion-
aires is central to UBS’s business
and growth. Its $2.6 trillion of in-
vested assets contributed over half
the bank’s revenue and nearly two-
thirds of its profit last year. The
Dutch banker’s lack of expertise is
concerning mostly because the co-
heads of the wealth-management

business—Tom Naratil and Iqbal

Khan—were two of the four internal

contenders for the top job. Both

men are “world leading,” according

to Mr. Weber, so it isn’t certain they

will stick around for long.

Mr. Hamers does have a range of

relevant skills. He has captained

ING through a recent money-laun-

dering scandal—a depressingly

valuable experience for running any

big bank these days.

His digital savvy can help slim

down and optimize back- and mid-

dle-office functions. Front-line ser-

vices are a bit less obvious—whiz-

bang apps are nice, but billionaires

do expect high-touch personalized

services from their Swiss bankers.

And UBS has already been investing

in digitization—Chief Operating Of-

ficer Sabine Keller-Busse, another

internal contender for the job, has

been overseeing its multibillion-dol-

lar annual investment in technology.

Mr. Hamers’s appointment will

likely contribute some immediate

cost savings—current UBS chief

Sergio Ermotti was Europe’s high-

est paid bank CEO in 2018, earning

more than five times the salary his

successor earned at ING, according

to Citigroup. And UBS’s 78.9% cost-

to-income ratio indicates that Mr.

Hamers can apply his frugal ways

more widely to cut costs and boost

returns.

It is a tough job, though. The

outlook for European banks is

harsh: persistent negative interest

rates, anemic growth at home, con-

tinuing global trade tensions and

economic uncertainty from the cor-

onavirus. UBS is well placed in

China, but that relatively high-

growth market is being targeted by

many rivals.

Shares of both banks jumped

Thursday on the news, though

ended the day nearly flat. ING’s ini-

tial bounce most likely reflected

shareholder relief—the Dutch bank

pulled a bond issue earlier in the

week and investors had feared the

explanation was new money-laun-

dering problems rather than the

CEO’s departure.

Mr. Weber’s plans are important

for UBS, but given his skills, so, too,

are the plans of the unsuccessful in-

ternal candidates for the CEO post,

particularly Messrs. Khan and Nara-

til. —Rochelle Toplensky

Having struggled to convince in-

vestors of its growth prospects, it

was high time forDropboxto try

something new.

The cloud-software company’s

fiscal fourth-quarter earnings re-

port late Thursday was a big step

in that direction. The results

themselves were the typical beat-

and-raise that most cloud compa-

nies have long mastered thanks to

the strong visibility offered by

contracted billings as opposed to

lumpy sales. Revenue of $446 mil-

lion for the December quarter

came in ahead of Wall Street’s

forecasts, as did the company’s

projected range of $452 million to

$454 million in revenue for the

first quarter.

Less typical was the company’s

aggressive boost to its long-term

profit targets. Dropbox said that it

now expects adjusted operating

margins of 28% to 30% by 2024

compared with the range of 20%

to 22% that it said it expected just

five months ago.

The company also surprised in-

vestors with a $600 million stock-

buyback plan—an unusual step for

such a young and fast-growing

company. According to data from

S&P Global Market Intelligence,

only one other cloud-software

company that has gone public in

the past five years has announced

a stock buyback.

Investors appreciated the sur-

prise: Dropbox shares surged 20%

Friday. That, too, marked a depar-

ture. The stock has fallen in the

trading sessions following five of

its previous seven earnings re-

ports, despite the company ex-

ceeding Wall Street’s revenue esti-

mates in each of those instances,

according to FactSet.

Before Thursday’s report, Drop-

box shares were down 28% over

the past 12 months and 11% below

its initial-public-offering price

from early 2018.

Like other megasize unicorns,

Dropbox has struggled to live up

Dropbox Finds a Way

To Shake Things Up

MARKETS

mid-July and mid-September,

then stopped. This was

roughly equivalent to 2% of

GDP, said Paul Meggyesi, a

currency strategist at JPMor-

gan Chase & Co. in London.

“I don’t agree with the

strand of thought that it

doesn’t matter if Switzerland

is labeled a currency manipu-

lator,” Mr. Meggyesi said.

“This is a U.S. administration

that is prepared to use the

tools at its disposal to coun-

teract what it sees as unfair

trade relations.”

It is uncertain exactly what

being labeled a manipulator

would mean for Switzerland.

The SNB has spent much more

than 2% of GDP on interven-

tion in the past and has been

on the currency watch list be-

fore. However, Mr. Trump has

given American companies the

power to pursue tariffs

against foreign competitors

who have benefited from cur-

rency manipulation in their

countries.

Switzerland’s problem con-

tinues to grow because it ex-

ports more than it imports,

and attracts a lot of capital

that is looking for a safe

home.

These pressures eased

while the Federal Reserve was

raising interest rates in 2018

and the European Central

Bank also looked like it might

start unwinding its easy

money policies. That ended

last year, when both central

banks reversed course amid

concerns about global eco-

nomic growth.

The SNB could make it

more costly to hold money in

Swiss banks by taking rates

further below the current mi-

nus 0.75% level, which is

matched only by Denmark. It

might have to if the ECB goes

deeper into subzero territory,

said David Oxley, senior Eu-

rope economist at Capital

Economics.

“The SNB is focused on

maintaining that gap between

European interest rates and

their own,” Mr. Oxley said.

“They’re kind of between a

rock and a hard place.”

The Swiss franc has
climbed to its highest level
against the euro in more than
four years, leaving Switzer-
land’s central bank with a di-
lemma: do nothing and poten-
tially damage the economy, or
intervene to curtail the rise
and risk angering the U.S.
The Swiss National Bank
has so far kept mum on its in-
tentions and investors are
torn. Some seem convinced
the franc will keep rising:
Hedge funds betting on fur-
ther strengthening have in-
creased their net long posi-
tions since the start of the
year, according to data on fu-
tures markets from the Com-
modity Futures Trading Com-
mission. Others warn such a
gamble is foolhardy.
“If you try to play games
with the SNB, it’s very danger-
ous for you,” said Thomas
Stucki, chief investment offi-
cer at St. Galler Kantonalbank
and former head of asset
management at the SNB.
“They will not hesitate to in-
tervene in the market.”
Weekly data from the SNB,
which analysts monitor as a
proxy for currency interven-
tion, suggest it has been act-
ing to stem the franc’s rise
already this year, buying
foreign currencies and selling
the franc. Its efforts have so
far failed to hit its main tar-
get: The franc has risen more
than 2% against the euro since
the end of 2019 to 94 Euro-
pean cents.
“If they don’t really man-
age to turn the tide on the
current trend, then they could
risk having to throw in the
towel,” said Andreas Steno
Larsen, global foreign-ex-
change and fixed-income
strategist at Nordea Markets.
At the same time, the franc
has fallen more than 1%
against the dollar to $1.02.
This is a problem because the
euro matters more for Swiss
trade and inflation, but the
dollar will matter more to the
U.S. Treasury, which last

BYCAITLINOSTROFF
ANDPAULJ.DAVIES

Swiss Franc’s Rise Has Central Bank in Bind

Sources: Swiss National Bank (total sight deposits); Haver Analytics (sight deposits share of GDP); Swiss Federal Customs Administration (trade); Standard Chartered (deviation)

*12-month change in total deposits as a share of rolling 12-month GDP, reported quarterly. Most recent GDP is third quarter. †Valuations as of February17.

Note: 1 billion Swiss francs=$1.02 billion

Total short-term deposits at the Swiss central bank

600

0

100

200

300

400

500

billion Swiss francs

2009 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20

Domesticbanks

Others

Switzerland’s trade in 2018 by partner,

in billions of Swiss francs

0 100 200 300

Exports

Imports

Euroarea U.S. Restofworld

Deviation from fair value in dollars†

Singapore dollar

Swiss franc

Chinese yuan

Japanese yen

Euro

Malaysian ringgit

13%

–74

–82

–164

–186

–296

Undervalued

Change from a year earlier in the value

of sight deposits as a share of GDP*

40

–20

–10

0

10

20

30

%

2009 ’11 ’13 ’15 ’17 ’19

vention is the SNB’s weekly

report on sight deposits, or

short-term franc deposits held

at the central bank by domes-

tic banks, the government and

others. When these are grow-

ing, that is a sign that the

SNB is selling francs, because

the central bank would be

buying foreign currencies

from banks and others, who

would end up holding more

The currency has

risen more than 2%

against the euro

this year.