It is all too easy to get excited when a private bank hires or fires en masse, and even more so when that bank is an industry giant like UBS.
So when UBS Wealth Management (WM) last month culled a number of staff from its Singapore and Hong Kong offices, the clamour was intense.
After all, this is the bank that, in the long aftermath of the financial crisis, stepped back from investment banking and doubled down on its wealth management business, effectively opting to ‘shrink to grow’; and it is the bank that has confronted the Asia challenge head on, pouring vast sums into a region ripe with potential and low on penetration.
As usual, the immediate focus was on numbers: how many were let go? Was Singapore or Hong Kong more affected? How many more to come?
All valid questions to be sure, especially if you are a keen industry watcher and especially if you believe yourself to be in the immediate line of fire.
In the ensuing ferment, a variety of answers were thrown up. Those with an ear to the ground may have heard a number in the vicinity of 90, with the majority of redundancies coming from UBS’ Singapore office. A more realistic (and widely-circulated) number was around 20-30, although UBS has been far more coy, as any bank in its position would be. Officially, an “insignificant” number were let go – just “a handful in Hong Kong” and “a handful in Singapore” – and this was all part of a “regular review”, according to a UBS spokesperson.
But of greater interest is the strategic significance behind these fires: has UBS, in its bullish ambition for the region overreached? Is Asia’s promise tapped out?
Juerg Zeltner, president of UBS WM, has made no secret of the importance of UBS’ Asia franchise to its overall business, telling Asian Private Banker that the region is the “largest profit contributor” to the wealth management business, accounting for 25-30% of global profits. Similarly, in an interview with media last month, Zeltner pointed out that he has rarely taken his foot off the accelerator in Asia, pouring millions into the region – even “through the worst moments after the financial crisis”.
A story foretold
The writing had been on the wall for some time. In 2014, group CEO Sergio Ermotti set a cost savings target of CHF2.1 billion (US$2.2 billion) by 2017 and, in May this year, he told analysts that the bank had identified “specific front-to-back initiatives that [it will] implement”, and was on track to meet the target.
That same month, Zeltner warned staff in an internal memo that the private bank faced reorganisation in a bid reduce organisational complexity and, ultimately, to slash the “cost run rate by hundreds of millions”
The announcement dovetailed with UBS’ dire first quarter earnings report, which revealed a 64% year-on-year (YOY) drop in profits, from CHF1.977 billion (US$2.056 billion) to CHF707 million (US$735 million), and a 16.5 point jump in cost/income ratio to 85.7%. More pointedly, the bank’s flagship wealth management arm, while attracting substantial net new money inflows over the quarter (including CHF8.8 billion [US$9.2 billion] in APAC), saw a 26% YOY drop in pre-tax profits and a 7 point increase in cost/income ratio to 66%.
Clearly under pressure to get things back on track (UBS shares have dropped over 27% year-to-date), the bank’s leadership has sought to trim the fat from its operations.
In the past year alone (2014-2015), the wealth management business shed 1% of its global staff and over 5% of its relationship managers. Closer to home in Asia, UBS WM’s frontline headcount growth has also ground to halt. Having notched up a CAGR of 6% between 2012 and 2014, the Swiss private bank’s Asia RM total slipped 8% in 2015, to 1,092, although 2016Q1 saw the addition of 33 client advisors in the region.
Of course, strategic redundancy is no silver bullet, but when the largest item on the balance sheet is personnel expenses (46% of total operating expenses in 2015), it’s a good place to start. The trick is to stem the asset loss.
When an RM switches jobs, she can expect to bring up to 30% of her client book; so marquee signings can be an expedient (if expensive) way for a private bank to bolster its AUM. At the same time, the bank that is shedding frontline talent (strategically or otherwise) runs the risk of shedding client assets in the process.
For the middle office, it’s a different story. Because client assets are not directly tethered to non-client facing personnel, middle office staff – along with low-performing RMs – are more vulnerable to redundancy.
This is especially true given the industry-wide trend towards automation of back and middle office processes and, more generally, to wholesale tech revamps.
As Salomon Wettstein, manager at integration consultancy, Synpulse, told Asian Private Banker in an earlier conversation, when banks implement large-scale tech plans, “we will see a natural loss of [operations] staff at private banks in the middle and back office … [while the] front line will remain unchanged.”
The onus will then fall upon client advisors to ramp up productivity.
Not so much a misstep as a remedial step
Little surprise then that Zeltner’s restructuring plans for UBS WM involve “some delayering and reductions in personnel, predominantly in non-client facing areas”. Juerg also revealed at a Zurich conference last week that UBS is planning to introduce an “online wealth management offering … [that has] no human interface [but will provide clients with] access to UBS”.
Little surprise, too, that UBS’ wealth management layoffs in the region occurred mere days after Zeltner’s internal memo leaked and just four months after Edmund Koh took over the reins from stalwart Kathryn Shih, who has gone on to become UBS’ APAC president.
Koh will have walked into his new role with clear instructions to prune the private bank’s Asia franchise in line with Zeltner’s wider restructuring plans and Ermotti’s CFH2.1 billion cost reduction target; and, of course, it is customary for a new boss to stamp his mark at the outset.
Insiders point out that the majority of redundancies were senior managers who had little direct impact on the private bank’s top line and were, in effect, remnants of the ‘old guard’. Among those to be let go were former SEA UHNW banker Joseph Poon, and Urs Greuter, a managing director and 17-year veteran, as reported exclusively by Asian Private Banker.
The fact of the matter is that that UBS WM’s Asia franchise occupies a nodal position in the bank’s overall business strategy, contributing the lion’s share of profits, but also receiving two-thirds of global net investments.
So management straddles an uncomfortable line between (targeted) growth and rationalisation. New offices in Kowloon and Shanghai will require more staff – UBS plans to double its total China headcount to 1,200 over the next five years and raise its Kowloon RM number to 50 by the end of the year – but these costs must be offset elsewhere, particularly given current market conditions.
Zeltner’s sobering warning last week that private banks face an uphill battle to grow revenues in the face of lacklustre client activity and negative interest rates will have cut gruesomely close to the bone of its Asia franchise, and of the offshore industry writ large.
And when Juerg’s nerves jangle, so do the industry’s; if the region’s largest offshore player is finding the going tough, then nobody is safe. But then it would be wrongheaded to conclude that UBS WM has taken a misstep. If anything, its latest ‘rightsizing’ activities bear the hallmark of fairly nimble corrective step, designed to cope with tricky conditions.
It just so happens that any time UBS makes a move, the industry will watch, ruminate, reflect and perhaps even learn from the successes and mistakes of biggest on the block. Don’t be surprised when other regional majors follow suit and make wholesale cuts.