Alex Wilmot-Sitwell’s visit to India in early November was against an extraordinary backdrop. It came at a time when UBS worldwide is struggling to recover from a financial crisis that has taken down rival Lehman Brothers, forced others to lose their investment banking status, and also resulted in revered institutions like the Citigroup and American International Group relying on government bailouts to survive. In an exclusive chat with BT’s Rachna Monga, Wilmot-Sitwell talks about the long-term implications of the financial crisis for UBS as well as its plans for India. Excerpts:
So, I hope all this is a good sign of UBS being back on track and able to deal with key issues that were the centre of the problem. I think, the markets and economies around the world will continue to operate in a difficult environment, we are going to see more volatility and the economic outlook will remain uncertain for some time to come. Right now, we are in a position where all news are pretty bad because everyone seems to be universally depressed and gloomy. And, when everyone agrees that things are going to get worse, it tends to mean that things are going to get better soon.
Q. Does this mean things should improve faster?
A. I think they should. But I think it’s going to be a long and difficult road ahead, in terms of restoring global growth and health of the financial markets and the banking system. We have seen more fundamental changes in the last few weeks than we have seen in the past 70 years.
Q. The Swiss government also picked up a stake in UBS. How does it change things for you?
A. On a fundamental level, it will not change our DNA. But I think it would be naïve to assume that government investment in any organisation doesn’t come without imposition of certain issues of governances, strategic planning and management of business. Having said that, it is quite clear that the Swiss government sees themselves as a shareholder and not as a manager and it’s also clear that they do not see themselves as a longterm shareholder of UBS. That is the current situation. But I would not expect them ever to become a direct shareholder by converting their indirect shareholding into a direct one. They have subscribed to a mandatory convertible note (MCN)—a convertible debt instrument that can be converted into equity after five years.
Q. Will government intervene in compensation policy, as much has been made about the “bonus excesses” at UBS?
A. Our compensation policy will be more transparent and carefully scrutinised both by regulators and shareholders. The alignment of interest of shareholders with those of the staff will be the focus of the compensation policy. What this means is that the compensation structures have to be evolved over a longer period of time such that the long-term performance of the business is the key driver of compensation; if you can perform above the benchmark average— such as total shareholder return—or generate economic profit above the long-term cost of capital, these will be the triggers, and drive future compensation policies.
"Our compensation policy will be more transparent and carefully scrutinised both by regulators and shareholders"
Q. Is the Swiss government’s bailout of UBS different from the US bailouts?
A. Yes, it’s different in various ways. We don’t want to recognise the situation as a bailout. It’s a novel situation to address the last remaining issues to be dealt with at UBS and at the same time we are restoring our capital. The way it’s different from any other transaction announced with banks today is that our restructuring deals with a de-risking component as we have transferred the risk exposure in real estate to a new vehicle that will be owned by the Swiss National Bank. At the same time, we have raised additional capital to restore it back to pre-crisis level. So, a lot of banks have de-risked and raised capital, but a combination of both is the differentiating factor for us.
Q. But the US has also taken stakes in some banks?
A. Yes, but they made direct investments and supplied capital. But they haven’t taken risk away. If you look at last announcement of Henry Paulson (US Treasury Secretary), it says that the Troubled Assets Relief Program (TARP) will not be used to buy risky assets of banks, but to provide cash. So, for those banks, the risky assets still reside in the balance sheets and the banks will have to find a way to exit them. Whereas, we have now exited all our exposure to the US and European real estate, thereby exiting illiquid assets. It’s a complete non-recourse transfer of these assets to a fund that will be owned by Swiss National Bank and we will help them manage the new fund by putting some of our people on the job for the next few years.
Q. Does it mean that you are better placed than the other banks to turn around?
A. To some extent, there is some merit in being one of the first to disclose the exposure we had and effectively take the write-downs in December 2007. We raised capital from GIC Singapore. I don’t want to assert that it’s a first-infirst-out approach and is still unpredictable. But I do think we have addressed the residual issues that could have given us cause of concern going forward. I think we are in good shape to recover once the market settles down.
Q. Did the turmoil put your plans for emerging markets like India on hold or prompt you to go slow?
A. Not really. But the time frame has become elastic. All markets have been affected more or less by what’s happening. Therefore, the pace with which we may look at building businesses has slowed. But we see the Asian region, particularly India, continuing to grow well above global averages. India will offer great long-term opportunities of investment for all our business activities. We are shrinking our businesses elsewhere.
Q. Do you see any change in the banking model of UBS?
A. We’ve announced that we will create more autonomy in our three businesses. It’s important not because we plan to divest or demerge, but these businesses should be managed in such a way that their performances are independently measured.
Autonomy doesn’t mean we don’t see huge opportunities in generating sustainable revenues through different businesses. It’s particularly valid in a country like India where private wealth and investment banking products and services are closely aligned, therefore, the revenue synergies are huge. Autonomy doesn’t mean that we don’t believe that revenue synergies across our businesses exist. But it’s quite clear that benefits we thought were available due to cost synergies of an integrated model were actually cost dissynergies. Autonomy means that each business will be more independently and separately managed. It doesn’t necessarily mean that corporate structure will change by creating subsidiaries.
"We have seen more fundamental changes in the last few weeks than we have seen in the past 70 years"
Q.In India, are you looking at acquisitions in commercial bank or asset management space?
A. I certainly don’t see us making acquisitions in the commercial banking area. If there is a right opportunity, we will still be interested in an acquisition in the asset as well as wealth management businesses. But at the moment our focus is on organic growth and investments to build our business.
Q. What are your plans for your commercial bank in India (you have a branch licence from the Reserve Bank of India)?
A. It’s taken a lot of time. In hindsight, I think it’s good that it has taken us longer than we had hoped as it’s much easier to build business in a market that is less overheated, and acquisition of talent is less expensive.
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