Singapore's Swiss Hard Cheese

The Chinese group's investment in Deutsche Bank is unlikely to turn so sour.
Photographer: Adrian Moser/Bloomberg

Sour grapes. That's a two-word description for the Singapore sovereign fund's decision to slash its shareholding in UBS Group AG at a loss after nursing the investment for nearly a decade.

But is the sale also a flashing neon "buyer beware" sign for HNA Group Co., the Chinese aviation-to-hotels conglomerate that recently boosted its stake in another European lender, Deutsche Bank AG? Probably not.

GIC Pte, the Swiss bank's largest shareholder, said on Tuesday that it was paring its 5.1 percent stake to 2.7 percent. When GIC announced in December 2007 that it would buy UBS convertible bonds for 11 billion Swiss francs -- roughly $10 billion at the time -- the bank had just written down U.S. subprime investments by an equal amount. GIC thought UBS was ahead of the curve in recognizing subprime losses, and a long-term interest would be a good play on the "high growth potential" for wealth management in Asia.

Nothing went according to plan. By the time the European sovereign debt-crisis flared up in mid-2011, UBS had posted $57 billion in writedowns and credit losses, and raised almost $41 billion in new capital, diluting GIC's 9.5 percent stake. Then came billions of dollars in fines and penalties for everything from Libor-rigging to improper sales of mortgage-backed securities to Fannie Mae and Freddie Mac.

A Fine Record

UBS, facing multiple regulatory probes, has about $3 billion set aside to deal with penalties

Source: Bloomberg Intelligence

While the post-financial-crisis regulatory burden continues to weigh on UBS, access to Asia's rich hasn't been as lucrative for the bank as GIC might have hoped. With $311 billion in assets, UBS is no doubt the largest wealth manager in Asia-Pacific. It has boosted assets in the region by 10 percent annually over the past four years, beating the global industry growth pace.

Still, Asia is also a crowded market, with contenders from Singapore's DBS Group Holdings Ltd. to Shenzhen-based China Merchants Bank Co. brandishing lofty ambitions. Elevated cost-to-income ratios dim the profit outlook for everyone, including UBS. The Swiss bank's return on equity in global wealth-management is now below 43 percent, down from 73 percent in September 2015.

GIC's disappointing journey might look like a cautionary tale for HNA. It isn't, for at least three reasons.

While UBS is one of Switzerland's two main lenders, Deutsche is Germany's only global bank. Although its misadventures in investment banking may have left it gasping for equity, the German lender is too big to fail in a way that UBS will never be. Deutsche Bank hasn't needed a bailout, but it's easy to see that with its deep ties at home, it could always get one.

Then there's the valuation to consider. Deutsche Bank shares are selling at half their expected book value a year from now, while UBS looked like a bargain to GIC at 2 times book.

Falling Knife Vs. Fallen Knife

China's HNA need not share Singapore GIC's regret over buying a stake in a Western bank

Source: Bloomberg

*Based on 12-month forward earnings estimates.

Finally, ambition matters: China needs the dealmaking heft of a global investment bank to assuage Western concerns over its One-Belt-One-Road project. Tiny Singapore was never playing for geopolitical advantage. It thought it was buying a good wealth franchise on the cheap, little knowing how it would rue the purchase a decade later.

HNA's European adventure is unlikely to leave such a sour taste.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andy Mukherjee in Singapore at

    To contact the editor responsible for this story:
    Matthew Brooker at

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