UBS to review businesses as recession test looms for industry

Singapore

THE world's largest wealth manager UBS is actively reviewing certain sectors or geographies in which the bank has exposure in this region. However, its focus now is not on cutting, but on slowing the pace of hiring, said its top executive in the Asia-Pacific.

This comes as the private banking industry is about to be tested. Clients will look across their three to four accounts to see how their wealth managers fare under recessionary pressures, Edmund Koh, president of UBS Asia-Pacific, told The Business Times in an interview.

"We're not in the area of cutting yet. There will be some sectors, as we speak, that we are actively reviewing, but it's still a bit early. Some sectors, for example, on the investment banking side, are slowing down substantially. If you staff up to meet that sector's potential growth and it's not happening, then you've got to right-size it."

He said it was too soon to say how the review will shape up, and that the bank is still working through it. "I just want to be very upfront ... but I also have to respect my colleagues' right to be informed first," he said.

Asked about costs, Mr Koh said the bank may pace out certain investments, but will not pull back on investing in China or in technology, having identified these as growth areas for the Asia-Pacific. The cost-to-income in the second quarter for the region rose from both a quarter ago and a year ago to 75 per cent.

"Some of our investments may slow down a little, but we will not pull away from these strategic investments ...We may give it another development over a year or 18 months, but we'll continue with that journey."

This is the tack he has taken for the shaky times ahead, on the basis of indicators such as the inverted yield curve, at which short-term rates go above long-term rates on US Treasury bonds. "To me, it should be soon. The next recession will test whether the way we have institutionalised our approach, in terms of safeguarding our customers' interest, actually works. I'm confident it will hold. Customers have at least three to four accounts; they will look at the relative experience across a few banks. I dare say, it will be good for us to be put to the test."

This test comes as the UBS reported a near-9 per cent fall in operating income for its Asia-Pacific business to US$554 million in the second quarter of this year. It reflected deleveraging and fewer transactions, with the weaker lending hitting the net interest income. In the current environment, these are "right outcomes", he said.

"In bad times, if customers are not doing as well, ... and our bank is doing very well in topline growth, I don't think our clients will necessarily be very happy," said Mr Koh.

The bank took in about 10 per cent more (about US$17 billion) in net new assets in the first half than a year ago on an annualised basis. UBS is firmly ahead in the Asia-Pacific, managing US$411 billion in assets as at the second quarter of this year.

Against an asset base of this size, the gross loan book stood at about US$42 billion, reflecting a leverage position of about 10 per cent.

"If you look at some of our very prominent and good competitors, their leverage is close to 20 per cent," said Mr Koh.

"One has to be quite circumspect in the way that we grow. I would like our topline to grow similarly with our invested assets growth. I don't like to maintain the same invested assets, and then squeeze the topline growth substantially. It simply shows that you are overleveraging the positions, and your own position, which does not stand the test of time when the recession comes," he said.

Running through the numbers, he said that ifthe bank were to bring leverage up to 15 per cent, it would make about US$250,000 more a day in pure pre-tax profit.

"The question is: Is that the right thing to do? I don't think it is. Not for now. But at the right time, we will grow. When we were at US$325 billion (in assets), our leverage to the book was close to (about) US$40 billion. But when you wind the clock back, it was the right time. The whole environment ... was more bullish."

Private banks are watching their change in share of wallet in the current investing environment; Mr Koh said the UBS should manage at least a third of the wallet of its regional clients.

"I'm about maybe a quarter, and I'm far from being there. When I first came in (to UBS), most clients had seven or eight accounts. If you're lucky, you got 15, 16 per cent (then)."

He is unfazed by the rising competition, as universal banks look to take on wealth management by working with Asian entrepreneurs on both their corporate and wealth needs.

"Banks that are clearly more corporate and retail (in nature) will say that since these entrepreneurs are banking with us on the corporate side, why don't we take their money from UBS as well? Customers do not park all their wealth in one bank. They go for specialisation.

"So, am I worried about what they say they will do? No, because every time some of these big corporate banks come into this play and hit a bad patch, they start cutting back again.

"Private banking is a business that is not going to give you a cost-to-income ratio in retail (banking) at 50 per cent. As good as we are, we're struggling at 65 per cent, or 61 per cent in the best years."

He added that regional banks would be "even more constrained" due to the high cost of the private banking business.

"Half the time you'll be left trying to subsidise the rates to try to take on the more sophisticated banks in order to gain market share. Admittedly, for some of the banks like ours, the cost of leveraging is slightly higher that some of the regional players, or even local players. But coming to their deployment of investments, as a total cost, it will be equating to (that from) these local banks because they don't have the bulk to provide what we have," he said.

"So at the end, you lower your cost of leverage to bring in more clients to gain market share? But they don't understand one thing. Most of the clients who take the leverage from them are investing through us.

"So I would say: Go with your specialisation of high margin to bring up your return on tangible equity, or whatever measures you have, rather than move into an area that is not your area of expertise. It's very expensive in private banking.

"I know - I look at all the salaries."