Career deal maker seeks to transform UBS investment bank into financial powerhouse

Written by New York Times | Updated: Oct 11 2014, 05:34am hrs
Nobody says Ferrari doesnt make cars or is too small to exist, says Andrea Orcel with a fiery Roman passion that seems out of place at a staid Swiss bank like UBS.

Since Orcel, a career deal maker, was named sole chief executive of UBSs investment bank two years ago, he has been on a tear, cutting costs, reining in the use of capital and pushing his dispirited troops to win more merger and initial public offering business.

In short, he has been on a mission to transform UBS sprawling and unfocused investment bank into a financial powerhouse despite UBS desire to limit its scope as the bank shifts its resources elsewhere.

When Sergio P. Ermotti, the chief of UBS, asked Orcel last year whether he was hosting an offsite meeting in Lisbon because his wife, Clara, was from Portugal, Orcel shot back: No, its because I got a 60% discount on the hotel. This year, Mr. Orcel did even better, taking his team to Arizona in July. If you can survive 45 degrees Celsius, rattlesnakes and the desert, we will win, Orcel declared.

How, exactly, is less clear.

Both Orcel and Ermotti insist the investment bank can flourish under the umbrella of UBS, which, in a shift in strategy started in 2011 by Ermotti, refocused its business away from risky investment banking to the steady business of wealth management.

But one of UBS most vocal investors, Knight Vinke, which has a 1% stake in the bank and an impressive track record of securing change at European companies, has long disagreed. It has argued that until the investment bank is split off it will be starved of the oxygen it needs to thrive and, more important, that growth in wealth management will be stunted.

In August, Knight Vinke proposed an alternative to an exchange offer which UBS officially announced at the end of September that asks investors to swap their shares for stock in a new holding company that houses UBS disparate businesses, including wealth management and investment banking.

Knight Vinke suggested that investors be allowed to swap their stock for separate shares in both the wealth management business and the investment bank. That would allow investors who do not share managements affection for the investment bank to sell those shares but keep their interest in the wealth management business.

UBS disagrees, contending that synergies between investment banking and wealth management make the businesses complementary, not contradictory. While UBS investment bank has shrunk, its wealth group has added nearly 200 client advisers since the end of 2012 and expanded its assets 12.5 percent, to $1.8 trillion.

We have zero intention of changing our strategy, said Tom Naratil, UBS chief financial officer.

Since he was recruited from Bank of America, Orcel has turbocharged the investment banks profits, driving up UBS earnings instead of dragging them down. Last year, Orcels first full year at the helm, the investment bank posted pretax operating earnings of 2.3 billion Swiss francs, nine times the profit in 2012.

More important, its return on attributed equity jumped to 28.7% in 2013 from 2.4% in 2012, helping make Orcel the highest-paid UBS executive in 2013. His total pay package of 11.4 million Swiss francs ($12.4 million) surpassed that of his boss, Ermotti. In the just-ended second quarter, the investment banks profit fell 25%, but return on attributed equity stood at 31.3%.

In late 2011, over a fondue dinner at Le Dezaley, an upscale Zurich restaurant,Ermotti pitched Orcel, whom he knew from their days together at Merrill Lynch, on the idea of coming to UBS. He picked Orcel, he said, because he wanted to move the business back to where the client is.

In late March 2012, just as Bank of America was planning to promote Orcel, who had worked there 20 years, he told the company he was leaving for UBS.

Andrea had no idea what he was getting into, Mr. Goldstein said. The key to his success was going to be building out a very substantial U.S. franchise. Instead, as soon as he got on board, he was putting out fires, appearing before regulators to explain UBSs past misdeeds and negotiating settlements. It really tainted them in the US market.

There was another challenge. On joining UBS, Orcel was thrust into a project led by Ermotti that would strictly limit the size and scope of the investment bank.

Orcel, a lifelong mergers and acquisitions banker, found himself arguing for fixed income, a business no one expected me to defend. You cant have a self-standing investment bank that pulls its weight in the group without one critical asset class.

Ultimately, UBS remained in fixed income, but its footprint today is tiny.

Regardless of whether UBS investment bank remains part of UBS or is independent, Orcel has his work cut out. Knight said the investment banking industry is only at the beginning of the restructuring that will be required, meaning that the capital and cost pressures Orcel has been wrestling with are unlikely to ease.

When Orcel gathered his team in Lisbon, he alluded to tensions within UBS about the investment bank. In the last six years, we have lost UBS 75 billion Swiss francs, he told the group. Are they right to be angry Of course they are right to be angry.

Then he added: But dont let anyone tell you you are a support function, a niche business.