Can UBS become Europe’s Morgan Stanley?

Over two days this month, UBS drafted in Roger Federer, Bill Ackman and the head of Covid vaccine maker Moderna to give a series of motivational talks to the Swiss lender’s 250 most senior private bankers.

The event — which took place at Zurich’s futuristic Circle conference centre — was hosted and organised by Iqbal Khan, UBS’s 48-year-old head of wealth management, to rally the troops after a tricky period for the business.

At the division’s first leadership conference for several years, Federer shared his experiences of coping with the pressure of being a tennis superstar. Stéphane Bancel, who oversaw Moderna’s revolutionary mRNA vaccine rollout, told delegates to “sweat the small details”.

Meanwhile, activist investor Ackman, a 20-year client of the bank, invited Federer to a tennis match on the roof of his company, Pershing Square, before telling UBS staff that the takeover of Credit Suisse looked like the deal of the century and they should not “screw it up”.

“The main message from management was to get back to basics,” said one attendee. “There is a billion dollars sitting on the table for us — we just need to hit the phones to clients and bring in more revenue.”

A year on from UBS’s rescue of its once-great rival Credit Suisse, the success of the most consequential bank merger since the global financial crisis is becoming increasingly dependent on whether Khan can turbocharge the wealth business.

UBS has attracted an increasingly demanding shareholder base over the past 12 months, with investors hoping the wealth division will fuel a surge in the bank’s valuation. The bank’s new three-year strategy is designed to achieve that.

“UBS continues to be seen and valued like a conventional European bank, despite being the largest global wealth manager and deriving around 60 per cent of its revenues from wealth and asset management,” Cevian Capital partner Gustav Moss told the Financial Times.

The activist bought €1.2bn of UBS stock last year in anticipation of the bank’s valuation doubling.

Khan’s performance over the next three years will have a huge bearing on his chances of winning the internal battle to replace chief executive Sergio Ermotti when he steps aside after the integration of Credit Suisse is complete.

Chair Colm Kelleher fired the starting gun on the succession race in November, saying he would like to line up a shortlist of three strong internal candidates within “a couple of years”.

“It is a huge job [Khan] has ahead of him, and there is no guarantee he will succeed,” said Johann Scholtz, banking analyst at Morningstar. “If he can deliver, it will be a massive feather in his cap.”  

Iqbal Khan, head of UBS’s wealth management division. One of his main priorities is retaining and regaining clients wary of the Credit Suisse integration

A UBS insider described Khan’s task as a “three-year job interview”.

His main priorities are retaining and regaining clients wary of the Credit Suisse integration, protecting its dominant global position as rivals try to poach advisers and clients, and boosting US operations so it can compete with its much bigger Wall Street rivals.

The challenges facing Khan and the wealth management business were laid out starkly last month when the bank published its full-year results.

In the final quarter, the business generated $381mn of pre-tax profit — a 64 per cent fall on the same period a year earlier — as integration costs mounted. The problems were especially acute in the Americas, where profit dropped to $102mn in the final three months — down from $375mn a year before and $471mn for the same period in 2021.

As part of the three-year strategy, Ermotti has targeted increasing invested wealth management assets from $3.8tn to more than $5tn by 2028.

To hit that goal, the business is aiming to attract $100bn of net new assets a year by 2025 as it tries to win back clients who left Credit Suisse in its final tumultuous years.

But the target is seen as conservative by analysts. UBS justifies it by pointing to expected outflows in the coming years as it reprices products that were previously offered more generously by Credit Suisse in order to make them more profitable.

It is also prepared to lose some former Credit Suisse clients who are overly reliant on borrowing from the bank without paying enough for other products and services.

“Too many client relationships are [based on single] products and not necessarily priced in the right way,” Ermotti said at a Morgan Stanley event last week.

“So we need to either get those clients to do more business with us and justify that kind of loss-leading position, or we need to accept that maybe some assets will go somewhere else. For me, it’s all about quality.”

Alastair Ryan, an analyst at Bank of America, said he expected lots of long-term Credit Suisse clients to go elsewhere. “It’s not about exiting bad people, it’s about exiting good people who don’t pay you enough or who use too much balance sheet,” he said.

“You can see quite a meaningful churn of clients if they’re saying, ‘let us sell you more things or we can’t bank you any more’.”

Once this sales strategy beds in, UBS expects to attract $200bn of net new assets a year by 2028, up from the $132bn it drew in last year and $89bn the year before.

The Credit Suisse takeover has cemented UBS’s position as the biggest wealth manager outside North America.

Bar chart of % share showing UBS’s wealth management business is skewed towards the Americas

But while the Credit Suisse deal has provided a shot in the arm for UBS’s wealth businesses in Europe, the Middle East and Asia — boosting assets by at least 50 per cent and contributing a decade’s worth of growth, according to Ermotti — the takeover did little for UBS’s US ambitions. Credit Suisse had abandoned the North American wealth market in 2016.

Expanding business in the US is a key priority for Khan. The Americas accounts for roughly half of UBS’s invested assets and nearly two-thirds of its advisers.

Yet in the US wealth market, UBS is far behind industry leader Morgan Stanley and also trails Wall Street rivals Bank of America and JPMorgan.

UBS’s Americas wealth business generated just $4 of profit for every $100 of revenue in the final quarter of 2023. That is only expected to rise to $10 to $15 by 2027, around half the profits margins of its big US competitors.

“The US is a major drag for UBS, whereas the rest of the wealth business is more like Morgan Stanley in terms of pre-tax margin,” said Kian Abouhossein, an analyst at JPMorgan.

BofA’s Ryan said: “If it were not for the interest in the Credit Suisse integration and related costs at the full-year results, we would have been all over the US wealth management issues because profitability has gone backwards. There is quite a lot of hard work to be done.”

According to people involved in UBS’s plans for its US wealth business, the bank is looking to replicate moves made by Morgan Stanley in recent years.

Bar chart of Cost/income ratio (%) showing UBS’s Americas wealth business is much less profitable than other regions

These include maximising revenues it makes from financial advisers, lending more to customers and targeting ultra-rich clients, which it specialises in serving outside North America.

The decision to bring in Morgan Stanley veterans Kelleher as chair and Naureen Hassan as head of the Americas business was no coincidence.

The hope is that UBS clients will buy more products that have lower levels of commission paid to financial advisers — such as mortgages — allowing the bank to increase its profit margins. 

“UBS is already one of the leaders in the attractive US wealth management market, and there are a number of levers that can and should be pulled to significantly raise UBS’s profitability there,” said Cevian’s Moss.

Longer term, analysts and investors have argued that the only way UBS will be able to mount a credible challenge to Morgan Stanley’s supremacy in the US wealth market is through buying local businesses to increase scale. But such deals would only happen after the Credit Suisse integration is complete.

People with knowledge of Khan’s plans said he viewed the US market with a seven-year time horizon. The first three to four years will be spent improving the current business, with the second period dedicated to building up scale, potentially through an acquisition or two.

“Morgan Stanley made a killing with the Smith Barney deal, and they have added to that with Solium, ETrade and Eaton Vance, giving them much more products to sell to their clients,” said Filippo Alloatti, head of financials credit at Federated Hermes, which invests in UBS bonds.

“It’s very hard to compete with that.”  

Additional reporting by Ortenca Aliaj in New York and Ian Johnston in London

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