UBS AG Chairman Axel Weber said Switzerland’s largest bank is “on the right path” with its plan to reduce debt trading and focus on wealth management to boost profitability.
The bank’s share performance “is a sort of vote of confidence by markets, and we’ll continue over the next two years to execute in a very disciplined fashion the strategy we’ve outlined,” Weber told Bloomberg Television’s Mike McKee in an interview July 12 at the Rocky Mountain Economic Summit in Jackson Hole, Wyoming.
UBS shares have gained about 20 percent since Oct. 30, when Chief Executive Officer Sergio Ermotti announced 10,000 job cuts and the plan to shrink its investment bank’s debt trading. UBS wants its wealth-management units, which lost 20 percent of their assets during the financial crisis, to contribute half of the Zurich-based bank’s pretax profit by 2015, up from 32 percent a decade earlier.
The bank will “over-achieve” on its plan “where we can do that at a reasonable cost,” Weber said.
UBS, which will report second-quarter earnings on July 30, closed at 16.76 francs in Zurich, up 0.5 percent on the day. It has gained about 19 percent this year, while the 40-company Bloomberg Europe Banks and Financial Services Index advanced 4.1 percent.
Ermotti announced his plans to overhaul UBS after stricter capital requirements and sluggish client activity hurt profit at the investment bank. The Swiss lender has overtaken Bank of America Corp. to top a ranking of the world’s largest wealth managers, according to a study of more than 200 firms published by Scorpio Partnership on July 10.
In the first quarter, the investment bank posted a 92 percent gain in pretax profit to 977 million francs ($1.03 billion), beating analysts’ estimates. Revenue at the securities unit rose 21 percent from a year ago to 2.79 billion francs, helped by gains in equities and equity capital markets.
Weber, 56, said that clients “have reshuffled their portfolios and focused on a much more global diversification” following the euro-area fiscal crisis. While the fixed-income business in the U.S. and parts of Asia is “stronger,” European clients have shifted toward equity-related businesses, he said.
The German-born executive predicted “a decade of equity rebounding” after a 10-year period where credit trading was more important, and said clients are now more focused on corporate bonds than sovereign debt.
Weber, who was president of Germany’s Bundesbank before joining UBS in 2012, said Europe is probably still “half a dozen years” away from reaching a full banking union.
It’s “surely something that Europe will need,” he said. “The European banking process, the healing of balance sheets, is not as far advanced as it is, let’s say in Switzerland or the U.S., so it needs to continue. It’s been talked about and decided in principle but the implementation will take time.”
Weber dropped out of the running to replace Jean-Claude Trichet as president of the European Central Bank in 2011, partly because he opposed the ECB’s decision to fight the debt crisis through buying bonds from Europe’s most indebted countries. The post went to Bank of Italy Governor Mario Draghi instead.
Asked about stricter U.S. rules, which force lenders to hold a minimum capital ratio of 6 percent for their banking units, Weber said that UBS is “in close contact” with the Federal Reserve and other regulators “to find ways and means to reassure them that if there were a crisis, capital is available.”
“It doesn’t mean that capital has to be held locally,” he added. “There are other forms of doing it than having capital locally, and that’s why we’re exchanging views.”
The international requirement under Basel III rules is a 3 percent leverage ratio, which doesn’t weigh assets according to their risk.
Banks have until 2018 to fully comply with the stricter Basel III capital rules. While the changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money, opponents have argued the move could trigger asset sales and hurt the ability to lend.
Weber said that it’s important to “strike a balance” between risk weighting, a regulatory measure of assets that determines how much equity capital must be held against each position, and the leverage ratio, which measures capital as a flat percentage of assets and ignores formulas that let banks hold less capital for assets deemed to be less risky.
“I have some understanding for requests to put more emphasis on the leverage ratio rather than just a Basel III risk-weighted approach,” Weber said. “That’s a debate that will go on between U.S. regulators and European regulators. In the end, we’ll probably see a system that has both of these elements, and that’s probably not a bad system.”