IFR Magazine - October 27, 2018

People

Markets

UBS puts extra capital into IB

UBS is aiming to deliver a return on equity
of about 15% at its investment bank over
THEûNEXTûTHREEûYEARSûWHICHûINCLUDESû
ABSORBINGûTHEûDRAGûFROMûALLOCATINGû3&RBNû
53BN ûMOREûEQUITYûTOûTHEûBUSINESS
4HEû3WISSûBANKûSAIDûITûWASûSTICKINGûWITHû
its strategy for its investment bank,
FOCUSINGûONûADVISORYûANDûEXECUTIONû
BUSINESSESûTHATûUSEûLESSûCAPITAL
UBS is strong in equities, foreign
EXCHANGEûANDû-!ûADVISORYûHASûAûDECENTû
presence in equity and debt capital
markets, but is underweight in most areas
OFûlXEDûINCOMEû)TûMAKESûAûGREATERûSHAREûOFû
revenues in Asia and Europe and less in the
53ûTHANûMOSTûRIVALS
h4HEûSTRATEGYûOFûTHEûINVESTMENTûBANKû
and its role within the group remains the
SAMEvûCHIEFûEXECUTIVEû3ERGIOû%RMOTTIûTOLDû
investors at a strategy update unveiled
ALONGSIDEûTHIRD
QUARTERûRESULTSûLASTûWEEK
“You will not hear about a new strategic
DIRECTIONû/URûSTRATEGYûISûTHEûRIGHTûONEv
Ermotti said the investment bank
should be able to absorb the drag from
HOLDINGûMOREûEQUITYûBYûGAININGûPROlTABLEû

market shares in the areas it chooses to

compete in, and tight control of costs and

RESOURCES

He wants the investment bank to deliver a

RETURNûONûATTRIBUTEDûEQUITYûOFûûINû

û4HATûISûSIMILARûTOûCURRENTûGOALSûBUTûTHEû

business will have to absorb higher equity

allocation to the business, which acts as a

DRAG

INFLATED RETURNS

UBS has been criticised in the past for the

amount of capital it holds in its corporate

CENTREû2IVALSûANDûANALYSTSûTOLDû)&2ûINûTHEû

PASTûTHISûINmATESûTHEûREPORTEDûRETURNSûFORûTHEû

DIVISIONSûESPECIALLYûTHEûINVESTMENTûBANKû

4HEûBANKûALLOCATEDûMOREûCAPITALûTOûBUSINESSû

units last year, and will increase the

ALLOCATIONûAGAIN

Ermotti said that’s because a restructuring

of UBS was now complete, so it made sense

TOûPUSHûMOREûEXCESSûCAPITALûTOûTHEûDIVISIONS

5"3ûSAIDûITûPLANSûTOûALLOCATEûABOUTû3&RBNû

of additional equity to its business divisions,

INCLUDINGûABOUTû3&RBNûEXTRAûTOûTHEû

INVESTMENTûBANKû4HEûINVESTMENTûBANKûHADû

3&RBNûOFûEQUITYûATTRIBUTEDûTOûITûATûTHEûENDû

OFû3EPTEMBERûCOMPAREDûWITHû3&RBNûINû



5"3ûWILLûALSOûALLOCATEûABOUTû3&RMûOFû

PROlTSûRETAINEDûINûTHEûCORPORATEûCENTREûTOû

BUSINESSûDIVISIONS

4HEûINVESTMENTûBANKûWHICHûCONTRIBUTESû

ABOUTûûOFûPRE

TAXûPROlTûISûEXPECTEDûTOû

CONTINUEûTOûCONSUMEûABOUTûONE

THIRDûOFû

GROUPûRESOURCES

Ermotti said UBS remains highly capital

accretive, and he aims to increase dividends

BYûûTOûûANNUALLYûANDûRETURNûEXCESSû

CAPITALûPROBABLYûTHROUGHûSHAREûBUYBACKSû

4HEûBANKûHASûBOUGHTûBACKû3&RMûOFû

SHARESûTHISûYEARûABOVEûITSû3&RMûTARGETûFORû



5"3ûSETûOUTûITSû

ûPLANSûAFTERû

DELIVERINGûBETTER

THAN

EXPECTEDûGROWTHûINû

EQUITIESûANDûlXEDûINCOMEûTRADINGûINûTHEû

THIRDûQUARTERû4HATûOUTWEIGHEDûAûDROPûINû

underwriting income to lift the investment

BANKSûTHIRD

QUARTERûPROlTSûTOû3&RMûUPû

ûFROMûAûYEARûEARLIERû!DJUSTEDûOPERATINGû

INCOMEûINCREASEDûBYûûTOû3&RBN

Steve Slater

Upsets unlikely as EU stress tests loom

European lenders are bracing for the
outcome of the European Banking
!UTHORITYSûûSTRESSûTESTSûDESIGNEDûWITHû
the most severe scenario to date and
INCORPORATINGû)&23ûûACCOUNTINGûSTANDARDSû
FORûTHEûlRSTûTIME
4HEû%"!ûPLANSûTOûPUBLISHûTHEûRESULTSûONû
ORûBYû.OVEMBERûû3IMILARûTOûTHEûû
EXERCISEûTHEûTESTûISûPRIMARILYûFOCUSEDûONû
the assessment of banks’ solvency in
VARIOUSûSIMULATEDûSCENARIOSû4HEûADVERSEû
SCENARIOûIMPLIESûAûDEVIATIONûOFû%5û'$0û
FROMûITSûBASELINEûLEVELûBYûûINûûTHEû
MOSTûSTRINGENTûYET
h4HEûSTRESSûTESTSûAREûNOWADAYSûGETTINGû
more ‘stressful’ as the EBA is able to run
tougher scenarios than it could in the past
due to the previous condition of some
banks and the associated political
CONSEQUENCESvûSAIDûONEû&)'û$#-ûBANKER
4HEREûISûNOûPUBLICûPASSûORûFAILûRATEû"UTû
BANKSûAREûGENERALLYûEXPECTEDûTOûBEûABLEûTOû
MEETûTHEIRû0ILLARûû0ILLARû2ûANDû'3)"û
requirements in all scenarios, as well as
MINIMUMûLEVERAGEûREQUIREMENTS
But bankers will be looking for any signs
OFûSTRAINûINûTHEûEXERCISEûWHICHûCOVERSûû
OFûTHEû%5ûBANKINGûSECTOR

h)TSûWORTHûKEEPINGûAûCLOSEûEYEûONû

DEUTSCHE BANK, who were very tight last

TIMEûANDûWHOûMAYûALSOûBEûEXPOSEDûONû

LEVERAGEvûTHEûBANKERûSAID

Based on data at the end of June,

European banks had an average common

EQUITYû4IERûûRATIOûOFûûACCORDINGûTOû

%"!ûDATA

%VENû)TALYSûLENDERSû

ûCURRENTLYûINûTHEû

CROSSHAIRSûOFûTHEûCOUNTRYSûlSCALûTUSSLEû

WITHû"RUSSELSû

ûAREûEXPECTEDûTOûFAREû

REASONABLYûWELLûBANCO BPM, INTESA SANPAOLO,

UNICREDIT and UBIûAREûALLûBEINGûTESTED

TRANSPARENCY WORK

4HEûRESULTSûMATTERûBECAUSEûTHEYûFEEDûINTOû

banks’ future Supervisory Review and

%VALUATIONû0ROCESSû32%0    ûREQUIREMENTSû

However, over time the tests have

morphed into more of a transparency

EXERCISEûTHANûAûVEHICLEûBYûWHICHûTOûFORCEû

BANKSûTOûRAISEûMOREûCAPITAL

-ANYûOFû%UROPESûLOWEST

RATEDûLENDERSû

AREûNOTûINCLUDEDûINûTHEûEXERCISEû"ANCAû

-ONTEûDEIû0ASCHIûDIû3IENAûANDû"ANCAû#ARIGEû



ûBOTHûUNDERGOINGûAûRESTRUCTURINGû

ûAREûLETû

OFFûNORûAREûANYû'REEKûORû0ORTUGUESEûBANKSû

BEINGûTESTED

One new aspect that will draw attention,

THOUGHûISûTHEûINCORPORATIONûOFû)&23ûû

accounting standards, which kicked in

FROMû*ANUARYû

4HATûFORCESûBANKSûTOûSTARTûPROVIDINGûFORû

possible future credit losses in the very

lRSTûREPORTINGûPERIODûAûLOANûGOESûONûTHEû

books, even if it is highly likely the asset

WILLûBEûFULLYûCOLLECTIBLEû4HATûFRONT

LOADINGû

is likely to put capital buffers under

ADDITIONALûPRESSURE

WORST-CASE SCENARIO

)&23ûûWILLûALSOûBEûAûFACTORûINûTHEû"ANK

ûOFû%NGLANDSûûSTRESSûTESTûTHEûRESULTSû

OFûWHICHûAREûDUEûONû$ECEMBERûû

Similar in scope to the EBA tests, there is

one key difference in the shape of hurdle

RATES

4HATûWILLûTESTûBANKSûAGAINSTûDRAMATICû

house price falls and much higher interest

RATESû4HEûOUTCOMEûISûOFûPARTICULARûINTERESTû

given the potential economic impact of

"RITAINSûEXITûFROMûTHEû%5ûNEXTûYEARû

although the BoE has long said its stress

TESTSûREPRESENTûWORST

CASEûSCENARIOSûRATHERû

THANûFORECASTSûOFûLIKELYûOUTCOMES

Alice Gledhill