UBS Chief Sergio Ermotti's Bull Run
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here is an adage on Wall Street: “It’s better to be lucky than good.” And if ever there was a banker with luck on his side it’s Sergio Ermotti, the global chief executive of Switzerland’s UBS.
Less than six months after he joined the bank to run its European, Middle East and African businesses in April 2011, a rogue trader in UBS’ London office lost $2.3 billion on a series of derivatives trades. The scandal forced the bank’s 67-year-old chief executive, Oswald Grübel, to resign. Suddenly, Ermotti was next in line to run the 152-year-old Zurich-based bank. By November he was CEO, and by 2012 he was the highest-paid member of the bank’s executive board. Good timing; great luck.
But Ermotti, 53, is also good—very good. He has had a singular focus on banking since age 15 when he took an apprenticeship at Switzerland’s Corner Banca, where young Ermotti learned to sell stocks and trade them. Eventually he got a certificate in Swiss banking and earned a master’s degree in management from Oxford. In 1987 Merrill Lynch hired him, and he spent 16 years climbing Merrill’s ladder in Europe and New York, becoming global equities boss. Charming and likable, with movie star looks, Ermotti parlayed the Merrill experience into the role of deputy group chief executive at Italy’s largest private bank, UniCredit. After being passed over for chief executive he took the job running Europe, Middle East and Africa at UBS.
Given the state of global financial services in 2011, one might think that landing atop a European bank was as much a curse as a blessing. The financial crisis left Europe’s banks crippled, and most of them are still busy untangling and deleveraging their balance sheets. But once again Ermotti got lucky.
As chance would have it Robert McCann, Ermotti’s former boss and mentor at Merrill Lynch, was busy revamping the Swiss bank’s US operations. McCann, 55, had spent 26 years at Merrill, first in trading and running its brokerage arm. The two men knew each other well. Back in 1996 it had been McCann who plucked Ermotti out of the obscurity of Merrill’s European operations, brought him to New York and promoted him to head global derivatives trading. Ermotti would work for McCann for the next six years. “He was a good mentor to me,” recalls Ermotti.
By the time Ermotti took the top job at UBS, McCann had been building up the bank’s brokerage force for two full years. This stroke of luck meant UBS’ American wealth management business was turning around, giving Ermotti an engine of growth as his team furiously shed risky investment-banking assets.
In the last three years UBS’ wealth management operation brought in $137 billion in net new client money. It is the largest private banker in the world, with $1.7 trillion in assets. In 2013 it is expected to earn $3.8 billion on revenues of $31.6 billion. And it’s a strong bank: In terms of Basel III’s stringent capital requirements UBS has already surpassed its target and now has a common equity tier one ratio of 11.9 percent.
At the same time McCann and his non-US counterpart Jurg Zeltner were expanding the wealth management business, the bank was going through a massive downsizing. In 2012 UBS announced it would fire 10,000 employees in investment banking, and has culled more than $300 billion in risky assets from its balance sheet.
“Many said it was impossible to shrink the bank to greatness, but now we have silenced our critics,” says Ermotti, describing the bank’s strategy as centred on wealth management, yet “complemented by a focused and less capital intensive investment bank.” Ermotti the trader is executing perhaps the smartest trade in financial services today, reducing exposure to capital-intensive and regulatory-heavy businesses like trading and investment banking, and moving quickly into less risky businesses that provide smaller but steadier streams of income.
The math is simple: Shares of BlackRock, the world’s largest asset manager, sell at a trailing P/E multiple of 20 while the world’s preeminent investment bank, Goldman Sachs, has a P/E of 11. BlackRock’s shares are up nearly 500 percent in the last decade, Goldman’s are up 79 percent, but large, diversified banks like UBS and Bank of America have seen their shares fall about 50 percent.
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