UBS Sees Fixed-Income Pickup as Bank Hones Super-Rich Strategy

UBS AG (UBSN) said a unit that helps the biggest Swiss bank target millionaires reported an increase in client trading this year as fixed-income sales jumped.

“Fixed income is significantly busier in terms of transaction volume than last year,” said William Kennedy, the Zurich-based head of UBS’s Investment Products and Services unit. “The foreign exchange business also remains robust with client activity levels at historic highs.”

UBS hopes the two-year-old IPS unit can boost margins at its private bank as stricter regulation erodes the profitability of its securities division. UBS Chief Executive Officer Sergio Ermotti, who took over from Oswald Gruebel following a $2.3 billion loss from unauthorized trading in September, is shrinking the investment bank and rebuilding a wealth business that lost its No. 1 ranking during the financial crisis.

While the MSCI World Index has gained 9.2 percent this year, customers are only gradually starting to invest more in stocks, according to Kennedy, 41, a former head of European equities who has spent almost 20 years at the bank.

“Everybody went into last year thinking it was going to be the year of equities,” Kennedy said in an interview at 45 Bahnofstrasse, where he sits alongside other members of UBS’s executive management. “Everybody got it wrong.”

While risks related to the European debt crisis and China’s economic outlook prompted UBS’s wealthy clients to pull back from trading in 2011, activity started to “tick up” in February, said Kennedy.

More Engaged

“Clients are significantly more engaged in the market now than they were at the end of last year,” said Kennedy, whose IPS unit distributes research ideas to about 4,200 client advisers on a conference call every morning.

UBS is building on its relationships with half the world’s billionaires by using the IPS unit and its Global Family Office Group to give ultra-rich customers with at least 50 million Swiss francs ($55.4 million) access to private-equity offerings and hedge funds run by firms such as Brevan Howard and Bluecrest Capital Management LLP.

“The ultra-high net worth segment provides an opportunity for UBS to differentiate itself from the pack,” said Christian Stark, an analyst at Credit Agricole Cheuvreux SA in Zurich. “It’s a market where the barriers to entry are high.”

UBS’s main rivals for the richest private clients are Credit Suisse Group AG and JPMorgan Chase & Co., according to Sebastian Dovey, a managing partner at London-based Scorpio Partnership.

Better Access

People in the “ultra-wealthy space” get better access to specialists at the firm, said Juerg Steiger, a funds and products salesman at the IPS unit in Zurich. Dealing with these clients is a “quasi-institutional business,” he said.

The IPS unit also provides ideas to UBS wealth clients with as little as 250,000 francs to invest. Stimulating demand for high-risk funds and initial public offerings may help boost earnings from customers who have become reluctant to trade in markets roiled by the European sovereign debt crisis.

Millionaire customers want original investment ideas, according to Thomas Kunz, a client adviser at UBS, who works with ultra-rich Greek clients. The flow of ideas from colleagues elsewhere in UBS is also beneficial, said Rene Gehrig, part of a Zurich-based team of advisers overseeing about 800 Swiss-domiciled clients.

Double-Dipping

UBS and other integrated banks can generate revenue from client-transaction fees for investing and by earning fees, otherwise paid to a third party, for products developed internally, according to Chris Wheeler, a London-based analyst at Mediobanca SpA.

“If the provider of the products is internal, the bank is effectively ‘double dipping,’” Wheeler said. “This is an enormously lucrative area for integrated banks. UBS will probably seek to grow the IPS unit when markets improve to support this strategy.”

While UBS doesn’t disclose how much profit the 2,000-strong IPS unit generates, the gross margin, or revenue earned on assets under management, at the firm’s wealth business rose to 96 basis points in 2011 from 92 basis points in 2010. Margins fell in the fourth quarter to 91 basis points as transaction-based fees slumped because of lower client activity. A basis point is one hundredth of a percentage point.

Clients are still looking for a “sustainable improvement” in the economic environment before taking on more risks, Chief Financial Officer Tom Naratil told investors at a March 29 conference in London. While this year’s rebound in financial markets is encouraging, costs and economies of scale will remain key issues for UBS, said Kennedy.

“Overall transaction volumes in the markets are still at depressed levels” said Kennedy, adding that the IPS unit must provide the technology, ideas and products to allow advisers to “deliver” to a large number of customers. “That’s how this game will be won in the next four or five years.”

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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