UBS's London bankers are just not that profitable but squeezing them works

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UBS's first quarter results are informative for any of its London employees who think they need to be paid more: the Swiss bank probably can't afford it. They also suggest that the new trend for forcing managing directors (MDs) in investment banking divisions (IBD) to have a lot of client meetings works: UBS's investment bankers out-performed the rest in Q1.

As the chart below shows, UBS's sales and trading business had a mediocre quarter compared to rivals. Revenues in FICC were down, albeit by less than at BofA. Revenues in equities were up year-on-year, but by less in percentage terms than every single U.S. bank that reported last week. The outlook seemingly isn't great. - UBS CEO Sergio Ermotti told Bloomberg that the volatility which benefited the securities business in January became more muted from February onwards.

The good news is that declining volatility didn't matter to UBS's investment banking division, where MDs are now being forced to have an average of at least one client-facing meeting every single working day. In the fourth quarter of 2017, revenues in UBS's M&A business fell 41% year-on-year as the bank hemorrhaged market share. In the first quarter of 2018, UBS appears to have regained share in M&A and debt capital markets (DCM), whilst holding its own in equity capital markets (ECM). It's not clear when the new system of enforced meetings was introduced by investment banking boss Andrea Orcel (himself a notorious workaholic), but something seems to have changed. Maybe squeezing senior bankers into getting out and meeting clients really works?

Squeezed or not, UBS's results fire a cautionary shot across the bows of any of its London bankers or traders who think they deserve higher pay. As the chart below shows, UBS's EMEA business (much of which is currently based in London) is simply not that profitable: margins are 17% compared to 50% in the Swiss-based business. Nor are they improving (unlike in APAC).This surely bodes badly for Brexit, when UBS is expected to shift staff to Frankfurt, thereby incurring additional cost and reducing margins further still. If you want to get paid in the investment banking division at UBS, you probably need to be in Zurich, or Singapore.

For all the paucity of profitability at UBS in London, profits across the whole investment bank were up 23% year-on-year in the first quarter. Pay seems to be rising accordingly. Personnel expenses globally rose 18% year-on-year in U.S. dollar terms in the first three months of 2018 due to what the bank describes as "higher variable compensation" (ie. bonuses) and average pay per head rose 10% to CHF184k.

At least one class of UBS employee is losing out though: like Credit Suisse and Deutsche Bank, UBS is squeezing contractors. Between the third quarter of 2017 and the first quarter of 2018, 2,243 contract staff were cut at the bank. Over the same period, 1,143 permanent staff were added. UBS CFO Kirt Gardner said it's cheaper to bring contractors in-house.

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