Orcel Facing ‘Hurricanes’ Remodeling UBS on Bygone Wall Street

Nov. 18 (Bloomberg) — Two years ago, after UBS AG decided to shrink its investment bank, Andrea Orcel told employees they had an opportunity to create a firm based on a model that vanished in the late 1990s.

That was an era before investment banks such as Merrill Lynch & Co. and Goldman Sachs Group Inc. ramped up borrowing to inflate returns. Orcel, who was hired to co-lead the UBS securities unit in 2012 and became sole head four months later, said a business that made money purely by connecting buyers and sellers and providing advice could work again, according to a person who attended the meeting and asked not to be identified.

In trying to rewire UBS’s securities unit into an old- school Wall Street firm, Orcel is making a virtue of necessity. Recent history left him and Chief Executive Officer Sergio Ermotti, 54, little choice but to work with lower leverage, fewer people and less capital. They have eliminated almost 5,000 jobs, cut assets by two-thirds, curtailed capital-hungry bond- trading businesses and imposed an approach that relies more on relationships than providing financing to win business.

“What I would very much like to create is a real investment bank, the kind that there aren’t anymore,” Orcel, a 51-year-old former Merrill Lynch dealmaker, said in an interview this month. “Are we there yet? No, we’re not there.”

Currency Fine

There are successes: Return on equity rose to the highest among the world’s nine largest investment banks in the first half. Revenue at the underwriting and advisory unit in the first nine months was 2.5 billion Swiss francs ($2.6 billion), 21 percent higher than two years earlier, while the trading businesses boosted sales 13 percent to 3.9 billion francs.

There’s also more to do, such as stamping out the misconduct that forced Switzerland’s largest bank to set aside $1.7 billion for legal matters in the third quarter. Last week it was ordered to pay almost $800 million for attempting to rig currency markets. UBS will have to replenish a talent pool depleted by years of turmoil, recapture market share in equities, boost revenue from mergers advice and underwriting and reinvent its fixed-income business, all while maintaining strict limits on capital and costs, current and former employees said.

“UBS has been successful in shrinking the balance sheet and refocusing the business,” said Guy de Blonay, who manages about $720 million, including UBS shares, at Jupiter Asset Management Ltd. in London. Now, “the investment bank needs to resolve outstanding litigation, reduce costs, establish a track record of sustainable earnings across the cycle and avoid large losses, even in difficult times.”

Facing Hurricanes

UBS, based in Zurich, lost 57 billion francs during the last financial crisis, forcing it into a state rescue and Swiss regulators to impose among the toughest banking requirements in the world. A $2.3 billion loss in 2011 from unauthorized trading fueled doubts about risk controls.

Sitting in a conference room at the investment bank’s Swiss headquarters in Opfikon, outside Zurich, Orcel said the business has faced “hurricanes,” not headwinds, over the past few years. Immaculately groomed, with silvering hair and dark lines under his eyes, he spoke about UBS’s plans for more than an hour, scarcely pausing for breath.

He’ll need all the energy he can muster to satisfy investors such as Knight Vinke Asset Management LLC, which urged UBS’s board as recently as August to spin off the investment bank to reduce risk. David Trenchard, a vice chairman of New York-based Knight Vinke, declined to comment for this article.

Middle Ground

Orcel says a slimmed-down, capital-light investment bank can provide services clients demand without putting shareholder or taxpayer money at risk. He disagrees with those who say there’s no middle ground between bulge-bracket firms such as JPMorgan Chase & Co. and advisory boutiques like Rothschild.

“We’re gaining people, we’re gaining clients,” Orcel said. “We are delivering.”

Investors have mostly applauded UBS’s decision to shrink its investment bank and focus on wealth management, boosting the company’s stock 37 percent in Zurich trading since late October of 2012. That compares with a 22 percent increase at Credit Suisse Group AG, the country’s second-biggest lender, which hasn’t gone as far in scaling back its securities unit. UBS is trading at 1.24 times book value compared with 0.87 times for Europe’s Stoxx 600 Bank Index.

Background Checks

On paper, many of the pieces are in place. The investment bank has trimmed risk-weighted assets to less than a third of the total in September 2011, a reduction that allowed UBS to cut equity consumed by the business by more than 75 percent. That helped boost return on equity, a measure of profitability, to 26 percent in the first half.

Completing the rewiring, a process Orcel has described as a three-to-five year project, will require more than cutting jobs and assets. He’ll need to eliminate the misbehavior that led to billions of dollars in fines and legal provisions for rigging global interest and currency rates.

To deter potential misconduct, UBS introduced periodic background checks for employees at the managing director level and above last year, and is extending the screening to lower levels. The bank says it has made it easier for workers who witness misbehavior to report it, banned the use of some chat rooms and last month tightened rules on how employees trade securities for personal accounts to prevent potential abuses.

Losing Share

“We cannot exist, we cannot survive without continuing to work on the culture,” Orcel said.

In investment banking, which includes advising on mergers and acquisitions and underwriting stock and bond offerings, UBS is trying to diversify its fee base beyond its strength with financial institutions, Orcel’s specialty. While that’s been a boon as banks raised funds during the European Central Bank’s inspection of their balance sheets, fees may drop when capital increases taper off.

UBS lost market share in equities trading during the financial crisis, and the scaled-back foreign-exchange, rates and credit unit is seeking to prove it can be profitable without the resources other major investment banks use to compete.

Orcel, an Italian, started his banking career at Goldman Sachs before joining Merrill in 1992 as an adviser to financial institutions. He has a degree in economics and commerce from the University of Rome and a master’s in business administration from Insead at Fontainebleau, near Paris. Current and former colleagues said employees often either love or hate Orcel, whom they described as tireless, demanding and direct.

Orcel is “the best investment banker I’ve ever come across,” said Matthew Greenburgh, a former dealmaker who worked with Orcel at Merrill Lynch before and after it was bought by Bank of America Corp. in 2009.“Perhaps some people may feel intimidated by him.”

Sleepless Nights

At his first town-hall meetings after taking over the unit, Orcel had to inform employees about job cuts and a sweeping reorganization. At a second round of meetings, early in 2013, he told bankers that many wouldn’t be getting bonuses following the fines for manipulating benchmark interest rates.

Early on at UBS, he said bankers should be on duty 24/7, suffer sleepless nights before pitching for business and be paranoid about winning mandates, according to a former employee who asked not to be identified because Orcel was speaking at a private gathering. Orcel made it clear that compensation would be more tied to performance than in the past, the banker said.

Orcel Pay

The highest-paid UBS executive last year with 11.43 million francs, Orcel received 24.9 million francs in deferred cash and shares when he joined UBS to compensate for awards he gave up at Bank of America. Some employees were upset about the awards, reported by the bank in March 2013 as many investment-bank employees were finding out their bonuses for the previous year were cut or scrapped, according to a former UBS banker.

Orcel still pulls his weight and gets client calls. He was a confidante of the late Banco Santander SA Chairman Emilio Botin, one of Europe’s most acquisitive bankers over the past two decades. Banca Monte dei Paschi di Siena SpA hired UBS last month to help explore strategic options, even after Orcel, while at Merrill Lynch, advised the lender on the 2007 purchase of Banca Antonveneta SpA, a deal that contributed to Monte Paschi’s need for a state rescue.

Over the past three years, underwriting and advisory fees from financial institutions made up 27 percent of the total at UBS, compared with 22 percent, on average, at the other eight biggest investment banks, according to data provided by New York-based consultant Freeman & Co. UBS is the No. 3 underwriter of stock sales by financial firms in 2014, up from sixth place in the past two years, data compiled by Bloomberg show.

M&A Mandates

UBS ranks 12th among advisers on M&A this year, down from seventh in 2007. One place it has fallen behind is at home in Switzerland. The top mergers adviser in the country before the financial crisis, UBS now ranks 17th on deals involving a Swiss company, data compiled by Bloomberg show.

Two former UBS bankers, who asked not to be identified, said the firm was struggling to win M&A mandates because of restrictions on financing. Orcel’s response to such complaints: Bankers who can’t build a relationship without relying on lending are either focused on the wrong clients or the wrong way to serve them.

Orcel hired William Vereker in 2013 and Ros Stephenson this year to bring the investment bank’s standing in Europe and the Americas closer to its position in the Asia-Pacific region. The two know each other from working for Lehman Brothers Holdings Inc. and are hiring bankers to rebuild, Stephenson said. UBS has hired 25 managing directors in advisory and capital markets in the Americas and 18 in Europe since 2013.

‘Absolutely Critical’

The fixed-income business, which Orcel called “absolutely critical,” is undergoing the biggest changes and is where he has said he sees the greatest opportunities.

UBS has pursued a different model than most competitors after deciding in 2012 to cut risk-weighted assets at the debt- trading unit by more than 70 percent. While fixed-income traditionally has made money through holding assets on the balance sheet and trading with clients, UBS is focusing only on clients to drive earnings, said Chris Murphy, co-head of what is now called foreign exchange, rates and credit.

While in the past UBS might have invested in distressed debt, the bank now pitches it to clients. That also can generate business prospects for colleagues in the corporate client solutions unit, Murphy said. The skills required from employees are “distinctly different” than a decade ago and rely less on a star trader or salesperson, he said.

Mike Stewart, head of equities trading who took over in 2011 after the unauthorized trading loss, describes the environment as “a game of hyper-efficiency.”

‘Negative Effect’

The equities unit, which had the second-highest revenue of top investment banks globally in 2005, has suffered as a result of UBS’s losses during the financial crisis and attempts to reorganize the securities unit since then.

“The repositioning of the investment bank has had a negative effect in areas that UBS actually didn’t want to downsize,” said Dirk Becker, a Frankfurt-based analyst with Kepler Cheuvreux who has a hold rating on the Swiss bank. “In equities, until 2007, UBS was the undisputed market leader among European firms.”

Orcel said he wants UBS to return to a top-three ranking in equities, including leading positions in cash equities and derivatives. The company was ranked fifth by analytics firm Coalition Ltd. in the first half. Its market share rose to 7 percent from about 6.5 percent in 2011, according to Coalition.

Stewart has focused on increasing that business in the U.S., where the bank is trying to expand in equity derivatives, boost electronic trading and cooperate more with the wealth- management unit. The firm ranked ninth in equities in the Americas in the first half and was among leaders in Europe and in Asia, according to Coalition’s data.

‘Perpetual Questions’

Orcel said what he’s trying to do at the investment bank with institutional clients is “very similar” to the way wealth management treats its biggest customers. The strategy based on advice and connecting buyers and sellers should raise the value of the investment bank in the eyes of investors, and it’s starting to bear fruit, Orcel said.

Whether the fruit ripens may be beyond his control.

“I don’t think you can simply go back to the old investment-banking model,” said Peter Hahn, a lecturer at London’s Cass Business School and a former Citigroup Inc. managing director. “Creating a new investment bank is a great opportunity, but Orcel has to achieve this in the face of perpetual questions about the strategy and future of UBS: Does Switzerland really want its big banks in the investment-banking business?”

To contact the reporters on this story: Elena Logutenkova in Zurich at [e-mail]; Aaron Kirchfeld in London at [e-mail]; Ambereen Choudhury in London at [e-mail] To contact the editors responsible for this story: Elisa Martinuzzi at [e-mail]; Simone Meier at [e-mail] Frank Connelly, Robert Friedman, David Scheer