UBS: From Discounts to Profits
Monday May 30 2011 | 07:53 AM

UBS AG's flagship private bank was so battered by the financial crisis and attacks from foreign countries on its secretive banking traditions that it had to offer wealthy clients hefty fee discounts to prevent them from leaving.

In recent quarters, that policy has paid off, helping the Swiss bank to reverse a three-year trend that saw the withdrawal of 195.1 billion Swiss francs ($228.6 billion) in funds belonging to wealthy clients.

Having achieved that formidable task, Juerg Zeltner—the 44-year-old head of UBS's private-banking arm, which has 790 billion Swiss francs in assets under management—now must wean those clients off discounts and boost the amount of profit the business generates.

What UBS's wealthy clients need to understand is that "quality has its price," he said.

"We've emerged from a time where we were extremely defensive, our clients were losing money, we had no pricing power and our franchise was under considerable pressure. We don't have that anymore. Now, our advisers are no longer acting from that position of weakness. They can confidently ask for the right price for the right services," Mr. Zeltner said in an interview.

He aims to have the private bank cooperate more closely with UBS's investment bank to help tailor products for wealthy clients, who typically want far more complex investment advice and products than are usually offered by private banks.

The pitch is most effective with the super rich—so-called ultrahigh-net-worth individuals who have more than $50 million in liquid, bankable assets.

UBS Chief Executive Officer Oswald Grübel has always held fast to the link between wealthy private clients and sophisticated investment-banking services. Mr. Zeltner echoes this sentiment.

"My opinion will always be, the private bank needs the investment bank," Mr. Zeltner said.

Super-rich clients accounted for a large part of the 11.1 billion Swiss francs in net new money Mr. Zeltner's unit attracted in the first quarter. That was the first period in which enough funds came in to confirm to investors that UBS had returned to inflows as opposed to outflows. He said performance in the quarter was skewed heavily by the ultra-rich, with a high proportion coming from emerging markets like those in Asia.

Like most private bankers, who forge relationships with clients over years and sometimes generations, Mr. Zeltner is hesitant to put too much weight on quarterly readings for net new money, saying the numbers are likely to continue to be volatile.

"The first quarter is usually a good quarter, but I have a lot of work to do in broadening net new money regionally and across our segments. There's always going to be volatility in the number from quarter to quarter, but what's important to me is that our teams are growing, that we are growing with existing clients, and that we're winning more clients in as many countries as possible over a series of quarters," Mr. Zeltner said.

For most of 2008, 2009 and 2010, UBS struggled to prevent wealthy clients from leaving as the bank faced a series of crises. First, its reputation was bruised by more than $50 billion in write-downs on illiquid mortgage-related securities. Then a messy U.S. crackdown into tax evasion through hidden offshore accounts wrought havoc on the bank's client base. UBS eventually admitted wrongdoing in dealing with wealthy Americans, paid a settlement fine, and handed over data on clients suspected of tax offenses. The U.S. offshore business, never a sizable one for UBS, has since been closed.

Although Mr. Zeltner usually talks to local press when he travels, he was guarded with more extensive interviews with international media as UBS scrambled to stanch its asset outflows. In recent weeks he has held private dinner meetings with analysts in London and Zurich to talk up the private bank's prospects.

The meetings "clearly illustrated that UBS wealth management is not anymore in crisis management mode, but growing the business profitably," J.P. Morgan analyst Kian Abouhossein said earlier this month, after seeing Mr. Zeltner.

While no longer in crisis, UBS's private bank still faces an uphill struggle.

The recent watering down of Swiss banking-secrecy laws is expected to put pressure on profitability as the bank chases a smaller pool of clients in offshore markets.

UBS and crosstown rival Credit Suisse Group are better equipped to deal with those changes than some of their smaller rivals, particularly because they have been quicker to expand outside Switzerland.

Swiss banking secrecy remains under pressure from Europe. Switzerland is negotiating with Germany and the U.K. over taxation of offshore accounts, as well as legalizing undeclared assets. The two big banks also face stiffer capital requirements as Swiss regulators search for ways to safeguard the economy from a potential big-bank collapse.

"We operate in volatile global financial markets as we deal with major regulatory changes and challenges. At the same time, we have a clear recovery trend we want to continue with, after we mastered the financial crisis and the bank's biggest crisis in its history. Keeping a cool head and doing the right thing for our clients amidst all this is the challenge for us," Mr. Zeltner said.

Though ultimately successful, the discounts offered to retain clients caused margins to sink far below those of Credit Suisse, the bank's most similar competitor. The plan to lift those again is showing signs of success.

In the first quarter, Mr. Zeltner's unit posted a gross margin on assets of 98 basis points, or 0.98 percentage point, within striking distance of a 100-basis-point target. Making more high-margin loans and lifting pricing back to normal levels will bolster the margin further, Mr. Zeltner said.

"It was never my goal to reach 100 basis points, and then stop. It's dependent on how markets develop and we are going to keep on track with our strategy, and I feel we certainly have room to expand the margin more," he said.

Clouds on the economic horizon have complicated that task.

Mr. Zeltner said client activity has been "dire" in recent weeks, as the wealthy haven't yet returned to the trading activities that in turn feed into bank fees and commissions. He expects clients to shake out of the lull and begin trading again when the U.S. settles a political debate over its debt ceiling, which threatens to rock financial markets. Continuing euro-zone debt restructuring problems are also hitting sentiment.

"It's no secret markets have not been cooperative this past few weeks—as a bank, we're totally exposed to these swings. The [strong] Swiss franc is also taking its toll," he said.

He is sanguine on hiring, saying UBS won't pursue its target of expanding to 4,700 client advisers, from 4,194 today, at any price. UBS will continue to bulk up in Asia, but in markets such as Italy, where Swiss private banks are feeling the effects of an Italian tax amnesty, growth will be far slower.

This reflects an increasing awareness by Swiss private banks that they must rein in costs to offset the pressure they face due to the Swiss franc's strength against the dollar and euro, which takes a bite out of profit because a large proportion of costs are in Swiss francs.

"I'm very disciplined about costs, stingy even when it comes to non-client-facing staff. We are looking at what we could move out of Switzerland, such as more of IPS [Investment Products and Services], where it makes sense to have parts of it closer to clients in Asia, for example," Mr. Zeltner said.