COMMENT: Should UBS thank CP Group for its sterling results?

05/02/2013

(From the International Financing Review - http://www.ifre.com)

By Keith Mullin

LONDON, May 2 (IFR) - I was thinking of laying off UBS for a while, following my two recent columns on the bank. But I received a cheeky note from someone there yesterday saying: "I was just wondering whether you saw our results and what you make of them, particularly as you ended your second piece with a reference to them".

It made me smile because I did indeed finish my last piece about UBS - which I guess had a less than positive bias - suggesting the proof of whether the bank's strategy is working would manifest itself in two ways: whether the bank can hire top talent from leading houses and in the quantum and provenance of earnings. "Q1 2013 numbers are out on April 30," I said. "Can't wait."

So, out they came. Now even prior to that date, it'd already been suggested to me that the results would likely be OK, but even so, let me give credit where credit's due. The results blasted analysts' estimates into kingdom come.

I could turn the impressive outperformance around and say the analysts hopelessly underperformed, but that would be a little cynical even for a sceptic like me. So I say well done UBS for delivering a great set of numbers.

No particular need to repeat the detail, but pre-tax profit of SFr977m on lower RWA deployment and a return on attributed equity of 49.5%? Can't argue with that.

Investor Client Services revenues more than double at SFr1.8bn - thanks mainly to equity derivatives; strong FX performance (options/electronic trading); an ECM performance that was off the scale (SFr503m vs SFr195m) although advisory and DCM revenues down 37% and 16% respectively.

A key improvement too in the cost/income ratio: 64.8% against - ahem - 114.7%. That's some improvement. In recent despatches, a recently departed UBS banker had told me: "The key issue for the investment bank is  cost/income, which is one place where UBS tops the league tables."

The media has been all over the UBS story for the past couple of days, with multiple talking heads comparing UBS favourably with Deutsche Bank (which also beat analysts' expectations in Q1), talking up the share price and espousing a general feeling that UBS will earn its way to its premium valuation.

Philippe Bodereau, head of European credit research at PIMCO, looked a little discombobulated speaking on Bloomberg TV saying the results at UBS investment bank were a bit of a mystery to him. He reckons people took UBS exiting FICC too literally and that maybe it's not cutting as deeply as initially thought. Don't know about that but for pulling the numbers out of the hat, I say fair play to Sergio Ermotti and his team.

"We believe the Q113 results mark an important point for UBS management in that they show that its new strategy can deliver. In particular, the 6bp rise in the gross margin and (SFr)24bn of net new assets add credibility to the strategy as it moves from being perceived as an investment bank to a private bank and the potential for a re-rating relative to peers," crowed James Chappell, a bank analyst at Berenberg Bank. "Capital position makes UBS the only IB to own."

There was a lot of comment in analysts' output, about the quarter's numbers validating the new strategy. On that point, I'm cautious. As was Ermotti, who I must say has been impressive in interviews: calm, considered and talking a lot of sense. "While it is too early to declare victory, last quarter we have demonstrated that our business model works both in theory as well as in practice ," he said on the analyst call. This was echoed by a UBS insider who told me: "one quarter is not proof, but it shows the model can work. There will be volatility; this quarter everything worked perfectly. We are very pleased but we're not yet shouting victory".

PRIVATE ECM

The earnings statement did contain the oddest comment, though: pre-tax profits at the investment bank almost doubled, it said, increasing from SFr509m to SFr977m, mainly thanks to what the bank said was a large private transaction in its equity capital markets business. This reference was peppered through the statement. What an intriguing thing to put into an earnings release. Being more than a tad curious, I contacted UBS to ask what that deal was. Unsurprisingly, I guess, but nonetheless irritatingly, they said it was private. Talk about red rag to a bull; figuring out what it might have been became a bit of an over-arching challenge.

I asked a bunch of senior ECM bods in London who came back with a couple of suggestions. But using the reach and expertise of IFR's mighty global ECM machine, we reckon the hugely lucrative deal was the engineering around Charoen Pokphand's acquisition of HSBC's stake in Ping An in china.

After China Development Bank pulled out of the deal, UBS stepped in to bankroll the whole thing in the form of a US$5bn margin loan using CP Group head Dhanin Chearavanant's equity stakes as collateral. The deal involved equity collars on Ping An stock as well as on CP All and CP Foods stock, plus the unwind block in CP All in March.

A bit risky, if you ask me, for a bank that's in the process of de-risking, but with fees potentially way in excess of US$100m and an out on the other side (maybe via the wealth management unit), I guess it was worth the effort.

I went back to UBS asking for confirmation that this was the business that catapulted its ECM business. "I can't offer any guidance," my source said. So, I really have no idea if Dhanin was behind the super-charged ECM outcome, but hey, I had a lot of fun in the hunt.

The stellar results caused a spike in the share price, which leapt to an intra-day high of SFr16.89 on April 30, a level they hadn't seen for two years. By this morning, the stock price had lost weight and Knight Vinke had come out with its incendiary open letter, which questions the merits of keeping the investment bank under the same roof as the wealth management and Swiss banking businesses.

Alas, windows of euphoria rarely last in these markets.

(This is from the International Financing Review, a Thomson Reuters publication - http://www.ifre.com) (keith.mullin@thomsonreuters.com)



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