Taking the long view on volatility

The Swiss banker who helped right the ship at UBS after a major scandal says the firm won't shrink from pursuing opportunities in China

Swiss banker Sergio Ermotti had a baptism by fire when he was appointed CEO of UBS Group in 2011, in the wake of a trading scandal that cost the bank $2.3 billion.

Ermotti was honored, but the new job came with lots of pressure and high expectations, the 55-year-old tells China Daily.

Since then, the bank has undergone a drastic restructuring, including a radical downsizing of its investment banking business. The changes have allowed the bank to focus on its strength in wealth and asset management and cut businesses that are no longer profitable.

"The defining moment for me was not just finding the strategy and executing it," Ermotti says. "More importantly, it was about seeing our employees and clients embrace it."

In China, with a slowdown producing some clouds on the horizon, Ermotti has also embarked on a strategy to play to the company's strengths. The emphasis is on expanding wealth and asset management, while maintaining its position in investment banking.

UBS has announced a plan to double its headcount in China by adding 600 employees over five years. The increases will be across wealth management, investment banking, equities, fixed-income and asset management, as well as some back-office operations.

The decision has come as the global banking industry's profit margins have been shrinking amid volatile market conditions. Some of the big banks have been slashing jobs to cut costs.

Ermotti spoke about the reasons for the expansion and other issues. The following are edited excerpts:

Q: Why did UBS decide to increase its headcount in China?

A: The decision was a natural evolution of our business in Asia. We have been present in the region for more than 50 years. We are aiming to grow our business in China to the next level, which is in line with our expectation for China to grow.

If you have 4 or 5 percent of growth in China for the next 10 to 15 years, you are creating another China. It is difficult to think of any other country or region that has such prospects for growth.

It is very interesting that our competitors have been trying to build up capabilities in Asia in good time. But the reality that we are seeing right now is very difficult to penetrate. It is not that you physically become a wealth manager by announcing that you have the aspiration. It took more than 150 years for UBS to develop its franchise and DNA of this magnitude. We are clearly not complacent about our competitive dynamics. When we look at our own capabilities and opportunities we see in China, we are very confident.

While upbeat about China in the long run, what do you think are the short-term risks?

After so many years of growth, what we see today is a very normal consolidation and repositioning of the economy.

It is not just a China problem. When I look at 2016, I think it will be a big year of adjustment. Maybe the next couple of years are going to be more challenging. That is the reason why I think we should focus on the long-term prospects.

What do you think about the policy uncertainties of China and the Chinese regulator's capability to manage the market?

We need to accept that the recent market volatility is the adjustment of an anomaly. All the measures that are taken at the regulatory and government level to go through this process will likely involve some degree of an experiment. In a crisis, you took actions to mitigate some issues but it may create collateral damage.

I would say that one has to recognize the ability of regulators to step in and recognize problems very quickly. Similar occasions take place outside China. I don't think at the end of the day investors are concerned about that part of the equation. More concerns may be about the sustainability of China's growth. People need to understand the outlook for the economy in the next couple of years in order to make better decisions.

How do you view China's efforts to reform and gradually liberalize its capital markets and how will UBS position itself to gain a bigger market share in China?

The expansion of the Chinese capital market is a very important trend for the entire economy as well as the banking system.

I think China needs to develop a deep and liquid debt capital market to create alternatives to the banking system. More sophisticated aspects of financing will come into play. With respect to where we want to grow, it is clear that our profit margin is much more linked to wealth management. The culture of wealth management in China is not there yet. The culture of diversification and the way to invest money abroad is not there.

China has about $9 trillion in retail deposits and if only 1 percent has exposure to foreign investment, it is still huge. That is why I am saying wealth and asset management and direct offshore investment have the biggest potential for growth.

What is your view on financial innovation as well as the new investment tools in the Chinese market, where financial derivatives have just started to develop but already have been blamed for causing market volatility?

In general, I would be very cautious about blaming any instrument for being responsible for such movements. It is not possible for any investors or speculators to generate such momentum if there is no underlying, strong tailwind.

The vast majority of the uses of derivatives worldwide is for hedging. I think it is correct to look at introducing new products and legislation very carefully while understanding that it is an opportunity for China to develop the capital market.

How has the "too big to fail" regulation been affecting UBS business?

The changing of regulations is not an issue just affecting UBS. It is affecting all of our competitors. We are not only prepared but also proactively addressing the issue. A big part of our strategic direction was about focusing on what we are good at and de-emphasizing what we are not good at.

We took a view five years ago that the regulation was there to stay and was becoming very binding, which constrained the way the banking industry was operating in the past decade.

We took a very proactive role, and I am confident that we have made good progress so far in executing on the various regulatory requirements. We are well prepared. The regulatory factor remains an uncertainty, and I don't see that trend stopping.

How would you define your management philosophy and how do you envision the future of UBS?

The defining moment for me was when I was appointed at a moment of crisis. What I was able to do in that environment was to focus the organization toward clearly defined goals. And most importantly, it was keeping discipline in executing plans.

I would say that my predecessors have been quite visionary in respect to their decisions on Asia and China. What I would like to do with our team is to make sure that my successors feel the same way I feel about my predecessors.

lixiang@chinadaily.com.cn

(China Daily Africa Weekly 03/11/2016 page31)