Is UBS missing out on the boom in investment banking?

 

The big American banks are doing brilliantly. All of them have exceeded analysts’ expectations with their quarterly figures these days. And in doing so, they are raising the bar for UBS – the only Swiss bank that can hold a candle to them.

Industry leader JP Morgan Chase again earned almost $13 billion in a quarter and surprised with strong stock trading and a resilient interest rate business. After an adventurous foray into the retail business, Goldman Sachs is refocusing on its core business – investment banking and serving very wealthy customers – and also recorded strong profit growth. Even Citigroup, which is undergoing a difficult restructuring, surprised positively.

And Morgan Stanley, the former employer of UBS President Colm Kelleher, reported a quarterly profit of $3.2 billion, 32 percent more than last year. Asset management and trading business flourished, as did classic investment banking, i.e. advising companies on takeovers, IPOs and raising capital.

This is actually good news for UBS, but it also brings with it a dilemma. She has promised not to let her investment banking grow too much – but it is precisely this risky business that is now likely to become highly profitable for banks again.

The Fed hasn’t disrupted the party yet

After all, US banks are surprising positively on several fronts. Firstly, they are managing the new interest rate environment better than expected. In September, the Fed lowered its key interest rate for the first time since the pandemic, by a high 0.5 percentage points; further reductions will follow.

As a rule, the income from this interest differential business decreases when interest rates fall, with the effect heavily depending on the bank’s customer base and business model.

But customers are also starting to actively invest their money instead of just leaving it lying around in their accounts, which promises banks new fee income. According to Sharon Yeshaya, Morgan Stanley’s chief financial officer, bank customers still hold a relatively large amount of money in cash. She also sees potential in the lending business. If interest rates fall, customers could take on more debt, which in turn generates new revenue for the bank.

 

Secondly, the major US banks are making a lot more money in investment banking again. The business of company takeovers and IPOs has been down for more than two years. Although the companies had plans in their drawer to acquire competitors or sell unproductive divisions, they did not implement them.

Because the American economy is still running smoothly despite high interest rates and interest rate cuts are imminent, optimism has now returned to the boardroom of Corporate America. The company bosses take the plans out of the drawer. The banks therefore expect that they are only at the beginning of a flood of deals that promise them high profits.

Thirdly, the banks were able to take advantage of the turbulent market environment in the third quarter. At the end of July, investors worried that the American labor market could cool down too much and expected the Federal Reserve to cut interest rates very quickly. They abruptly changed their minds again in September because unemployment in the US remained low and the economy continued to grow strongly.

In between, a strengthening yen caused a short-term market collapse, especially in Japan, and an abrupt start in capital flows worth billions. The banks benefited from this environment directly in trading business and indirectly because their customers reallocated their assets.

Customers who do not trade on the stock market on a daily basis in particular seek advice from their bank in uncertain times. They then not only place stock market orders, but also conclude more comprehensive asset management mandates, which are very lucrative for the banks in the long term.

Morgan Stanley – the major US bank that can best be compared to UBS – raised $64 billion in new money in its asset management business in the third quarter and now manages a total of $6 trillion. For comparison: UBS asset management attracted 27 billion dollars in new customer money in the second quarter, and the total amount of money under management is 4 trillion dollars.

What the boom means for UBS

UBS cannot be directly compared with the major American banks; Its investment banking and trading businesses are smaller and less diversified, but it outperforms the Americans in asset management in Asia and Europe. In the USA, UBS also serves many rich clients, but earns less money from it.

UBS is confident that it was also able to attract many new customers in the uncertain market environment. The experiences of the American banks also lead to the expectation that UBS customers will also be able to trade more on the stock market again, conclude asset management mandates and take out loans.

 

Like its competitors, UBS could also surprise positively in investment banking, although the effect on the overall result will be smaller than that of Goldman Sachs.

The gold-rush mood of the American competition in investment banking could once again reignite the discussion about what role this business should play at UBS. With the takeover of Credit Suisse, the bank has brought in new expertise in investment banking, which it also wants to make available to its wealthy private customers.

In Switzerland, however, people are worried that UBS could again be too big and too risky. For this reason, the company’s top management around CEO Sergio Ermotti had always emphasized that investment banking should not tie up more than a quarter of UBS’s risk capital; and that the division should primarily serve asset management.

Over the past two years, as investment banking experienced an extended downturn, it was easy for UBS to impose this restraint. As Wall Street rivals head back toward record results, maintaining that self-control will become more difficult.