UBS AG, Switzerland’s biggest bank, said its profit margins in Asia may shrink for as long as two years as competition for bankers in the world’s fastest-growing major economies drives up compensation costs.
Staff expenses are increasing faster in Asia than in any other region, Alex Wilmot-Sitwell, co-head of UBS’s Asia-Pacific operations, said in an interview in Sydney yesterday. China, India and Indonesia are among “hot markets” where employee costs are climbing, he said.
“Unless your revenues are running at significantly higher levels than that, this may lead to a risk of margin compression,” said Wilmot-Sitwell, 49. “If history is any guide, it will likely persist for a year or two.”
Banks are sacrificing profitability for a slice of Asia’s expanding markets for personal wealth and corporate advisory services as growth in the region outpaces the U.S. and Europe. Thinner margins in Asia may make it harder for UBS to meet Chief Executive Officer Oswald Gruebel’s demand for “significantly” better investment-banking earnings in 2011 after the bank returned to profit last year.
UBS’s workforce in China, the focus of the bank’s Asian recruitment plans, will double to more than 1,000 people in five years, said Wilmot-Sitwell. Research staff in the nation will triple to 100, he said. The former co-head of UBS’s investment bank shifted to his current role in Hong Kong in November, and he is a member of the group executive board.
Cost of Business
“It’s an investment cost of continuing to grow a business in the fastest-growing market in the world,” he said. “There’s wealth creation in China today on a scale that’s never been seen.”
UBS’s Asia-Pacific workforce, which expanded 6 percent to 7,263 people in 2010, may sustain that pace in the next five years, he said.
HSBC Holdings Plc and Standard Chartered Plc, the two British lenders that make most of their profit in Asia, are also paying more to hire bankers in the region as revenue climbs.
HSBC last month said rising staff costs outpaced revenue growth as it posted full-year earnings that missed analysts’ estimates. Peter Wong, HSBC’s head of Asia, said this month the London-based bank was “well short of talent” in China. HSBC Chief Executive Officer Stuart Gulliver said he was paying more for bankers in Asia than in Britain.
At Standard Chartered, expenses increased last year after the bank added branches in China and hired 7,000 people. Staff costs swelled 17 percent in 2010 while headcount climbed 9 percent, the lender said March 3.
Wilmot-Sitwell said he’s relying on China, Hong Kong, Japan, Singapore and Australia to drive growth in the region for UBS, which was the top arranger of Asia Pacific mergers and acquisitions in 2010, according to data compiled by Bloomberg.
In China, the bank has been hired to work on more than 50 initial public offerings, he said. Under a three-to-five year plan unveiled in 2009, he’s charged with increasing Asia-Pacific revenue 66 percent to about 8.5 billion Swiss francs ($9.1 billion).
UBS wealth managers and investment bankers can win work for one another from the family-owned businesses that dominate many Asian nations, according to Wilmot-Sitwell. Such so-called cross-selling revenue may double to 1.5 billion Swiss francs in the next four years, he said.
“Much of the private wealth we manage is linked to business ownership and capital markets activity,” he said. “If we join that up properly, then we have a huge opportunity.”
Still, violence in the Middle East is weighing on the flow of Asian takeovers, and share and bond sales, he said.
“The corporate attitude is quite cautious and the institutional attitude is quite cautious,” said Wilmot-Sitwell. “There’s quite a good appetite for client activity, but we’re going through a period of uncertainty which is holding things up.”