Putting All Our Eggs in China's Basket Came at a Cost, UBS Says

  • Firm trails Morgan Stanley, Citi in Asia banking revenue
  • Kendall revamping team to capture more cross-border deals

UBS Group AG, which built an Asian investment-banking powerhouse around the strength of its China business, is finding that excessive reliance on one single market can be a bad thing.

Sam Kendall, who was promoted last year to run the regional investment bank, is trying to widen UBS’s scope by assigning more bankers a pan-Asian focus and pushing them to pursue deals that aren’t directly linked to the health of Chinese markets. While Kendall stressed that China is still a crucial market for UBS, he acknowledged the bank hasn’t paid enough attention to other parts of Asia.

Sam Kendall

Photographer: Justin Chin/Bloomberg

“We were 100 percent focused on China,” Kendall said in a recent interview. “That is good when China is really going well. When China doesn’t go well, it means you haven’t necessarily got the agility in your business."

As Chinese companies started raising billions of dollars going public in Hong Kong more than a decade ago, Kendall was part of the equity capital markets team that helped UBS flourish. But with Chinese banks taking market share, fees falling and regulatory scrutiny increasing, that business has lost much of its luster.

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Morgan Stanley, Nomura Holdings Inc. and Citigroup Inc. generated the most revenue from investment banking in the Asia-Pacific region last year, followed by UBS, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Credit Suisse Group AG, according to data from researcher Coalition. Excluding China, UBS ranked No. 8 in underwriting equity and equity-linked sales in Asia last year, Bloomberg data show. Nomura and Morgan Stanley led that league table.

As Kendall, 46, held introductory meetings with investment bankers after his promotion, he heard a litany of complaints about a bureaucratic management structure that was slowing decision making and causing UBS to lose business.

"There was a sense that we had lost our mojo,” he said. "The business seemed to be lost, and there was frustration. What we were really good at once upon a time was not necessarily working as well as it had previously.”

Fees from Chinese companies accounted for about half of UBS’s Asian investment banking revenue in 2015, Kendall’s predecessor Matt Hanning said in an interview that year. When the Chinese equity market went into free-fall in mid-2015, UBS was exposed. Pretax profit at at the firm’s investment bank in Asia -- which also includes businesses such as equity trading -- tumbled by about two-thirds last year, to 300 million Swiss francs ($299 million).

Another blow came in October, when UBS said it could be fined in Hong Kong and suspended from acting as a sponsor on IPOs there as punishment for its work on past deals it didn’t identify. Hong Kong regulators have been cracking down on investment banks for taking companies public that later became embroiled in accounting scandals. UBS ranked 19th in advising on Hong Kong IPOs over the past 12 months, data compiled by Bloomberg show.

Kendall has put more emphasis on winning advisory work in other parts of Asia, especially Southeast Asia, South Korea and India. He also plans to double the size of his regional team of mergers advisory specialists to about 14 people. Another effort involves putting junior bankers into industry-focused teams, rather than having them concentrate on a single country. The goal is to get better at winning follow-up deals advisory work from corporate clients, according to Kendall.

"There are a number of companies, for which we managed IPOs four or five years ago, that have done M&A transactions over the last 12 months which we didn’t know about," Kendall said. Properly covering a corporate client “involves more than just a coffee in the Four Seasons Hotel lobby."

Several senior UBS bankers have left since Kendall’s elevation, including Saurabh Beniwal, who ran investment banking in Asia excluding Australia and Japan. Japanese-speaker Andrea Casati was hired from JPMorgan Chase & Co. to run the regional equity capital markets syndicate business, after Damien Brosnan’s departure. Kendall said some 15 bankers have been hired to replace the approximately 20 who left since he took over.

There are signs that Kendall’s revamp is starting to bear fruit. UBS ranks second in mergers advisory in the Asia-Pacific region so far this year, data compiled by Bloomberg show. It was No. 4 in the year-earlier period. Kendall said the number of transactions submitted to UBS’s investment committee for vetting roughly doubled in the second half of last year from the first six months.

As for better capturing China’s outbound deals frenzy, UBS may be coming late to the party. Beijing has increased scrutiny of overseas investments, while regulators abroad have blocked Chinese buyers in sectors including energy infrastructure, technology and electronics on security grounds. As much as a third of the $220 billion worth of cross-border deals announced by Chinese acquirers last year have been canceled or withdrawn, according to law firm Linklaters LLP.

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