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UBS should stop trying to be a major investment bank and just become a boutique

Alessandro Della Bella/Keystone/dapd/AP
Smaller is better for UBS’s investment banking.
EuropePublished This article is more than 2 years old.

UBS surprised the market yesterday with its better-than-expected profit for the first quarter. The Swiss bank has been restructuring—including cutting 10,000 jobs–to focus more on its crown jewel wealth management business. And it appears to be having a positive impact.

But that progress only makes clearer that UBS’s deals advisory business, which used to be a point of pride at the bank, is just a shell of what it once was. Investment banking at UBS has already taken the biggest hit as part of the overhaul. That’s why as part of its revamp, UBS should no longer try to be a major investment bank in the US and turn that unit, including its mergers & acquisitions business, into a boutique. UBS could abandon the pretense of having comprehensive investment banking services and pick and choose just the parts of the business that are especially lucrative or otherwise useful for the rest of the bank. And, as we’ve written before, boutique banks are enjoying something of a heyday right now.

UBS has already largely gotten out of the risky parts of the debt trading and fixed-income businesses in investment banking. This year, UBS cut about one-third of its staff at the Americas investment banking unit. The bank also shut down its Los Angeles office, and its San Francisco office is like a ghost town, sources said. It also let go of its Canadian M&A team.

Those locations weren’t generating much M&A business for UBS, sources said. And while UBS has shrunk its M&A team, the group has more senior bankers than before, the sources said. They also noted that UBS advised KKR on its $3.7 billion acquisition of industrial company Gardner Denver in March and is working with Sprint on its sale to Japan’s Softbank, showing UBS is attracting brand name clients.

“The advisory business is a capital-light, high-margin business so it fits perfectly with the strategy and the emphasis on enhanced profitability,” said Larry Grafstein, co-head of M&A in the Americas. The veteran dealmaker was co-head of M&A at Rothschild until last year. “I came to UBS because M&A was recognized as a key part of the bank and a growth opportunity.”

UBS’s focus on making the investment bank more profitable is all the more reason to get the division to the right size. And that means shrinking it even further so that it’s focused on supporting the wealth management unit. It’s worth still focusing on trading in equities and foreign exchange markets, where the bank is making money.

But corporate lending, IPO underwriting and other activities where UBS is weak should be reduced. And its M&A dealmaking footprint should be much smaller, and focused on feeding into its wealth management activity. Private equity titans, CEO or entrepreneurs who come into money after a sale of a company can use UBS to advise on a deal and then the wealth management arm can tell them what to do with all that cash. So instead of competing with JP Morgan and Goldman Sachs in the US, UBS should be more in line with Lazard or Evercore.

UBS used to be one of the top M&A banks (its Asian business still falls into that category), advising on mega deals like the $57 billion sale of Gillette to Procter & Gamble in 2005. But for the last several years, UBS bankers complained that the firm treated its investment banking arm like an unwanted child. They said that UBS didn’t really invest in the business or pay much attention to it. As a result, the unit has lost dozens of senior bankers in the US over the last few years. Its advisory business was barely mentioned in yesterday’s earnings, though sources said that’s because the emphasis was on updating the market on its restructuring.

There was a time when its investment banking unit in the US could have been sold to another firm that wanted to grow its presence on Wall Street, according to sources. But given how much its business has deteriorated, it’s unlikely it would find a buyer now. M&A can also be expensive for UBS to retain, given the amount of money it takes to attract talented staff. And several of the remaining bankers are looking for jobs at other firms, sources said.

For the first quarter of this year, UBS’s advisory revenue was down by 33% compared to the same period last year and down 37% from the last quarter. Granted, M&A isn’t normally a huge driver of revenue. But it brings prestige to a bank, often generating headlines for a firm advising on big deals. If a bank is lagging behind, its M&A business becomes more of a liability.

In the ranking of M&A advisers for the first quarter of this year, UBS barely made it in the top 20 for both global and US deals, coming in at No. 18, according to Dealogic. The much smaller boutique firms started by former UBS bankers—Moelis, Centerview, and LionTree (established just last year)—all came out ahead of the Swiss bank. (Thomson Reuters data, however, show UBS currently at No. 7 for M&A in the Americas, and No.9 for global M&A last year.)

UBS is a global firm with about $3.2 billion annual pre-tax profit and 62,000 employees, just 15,000 in its investment banking business. The Swiss bank is already perceived as a wealth management business with a side division of investment banking in the US. Now it’s time for reality to catch up to perception.

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