Quickly after Iqbal Khan joined Credit score Suisse in 2013 he was invited to dinner at Zurich’s elegant Ristorante Bindella for a discreet dialog with the chief monetary officer of UBS, his new employer’s fierce rival.
Khan had bought to know Tom Naratil properly over the earlier two years whereas Khan was a associate at EY and lead auditor to Switzerland’s UBS. Over a chandelier-lit pasta meal, Naratil determined UBS would profit from bringing the extremely formidable Khan onboard.
Now, two years after the ex-auditor lastly joined his one-time shopper, Khan and Naratil are operating UBS’s $3.6tn wealth enterprise, the financial institution’s beating coronary heart and its earnings engine. “The truth that they didn’t find yourself in a state of affairs the place both bought fired or they killed one another, that’s really a reasonably good relationship,” stated a senior UBS government.
However with earnings hitting file ranges, the pair should now show they’ll preserve returns excessive whereas additionally managing the rising dangers.
Because the world’s largest wealth supervisor, UBS has had a stellar pandemic. Its ultra-wealthy purchasers have seen their property soar on the again of the trillions central banks pumped into the worldwide economic system. A lot of that injection has ended up within the monetary markets, serving to the total wealth of billionaires worldwide rise from $5tn to $13tn within the first 12 months of the pandemic.
UBS’s International Wealth Administration enterprise reported $1.3bn of quarterly pre-tax earnings in July, accounting for half the broader group’s complete earnings. That represented a 47 per cent enhance on a yr earlier and its best second quarter ever, with file earnings in Asia.
However UBS’s resurgence in wealth administration has as a lot to do with a brand new technique code-named Elevate, which was launched by Naratil and Khan 18 months in the past, because it does with macroeconomic occasions.
The plan was to restructure the ailing wealth enterprise to make it extra environment friendly and promote higher-margin services to UBS’s richest purchasers, making the most of the financial institution’s appreciable heft.
“I don’t suppose it was rocket science what we did,” stated Khan in an interview with the FT. “It was all about how do you elevate the enterprise based mostly on the good basis it already has.”
However the emphasis on wealthy purchasers borrowing extra, buying and selling extra and taking up extra refined merchandise has raised considerations that UBS is taking up riskier enterprise for the sake of larger earnings.
It was a technique Khan pursued with vigour as head of the wealth enterprise at Credit score Suisse till his dramatic departure two years in the past after falling out with the group’s then chief government Tidjane Thiam.
For the reason that launch of Elevate in January 2020, invested property in UBS’s wealth arm have ballooned by $595bn, greater than the entire property below administration of Switzerland’s third-largest financial institution, Julius Baer, which Khan was near becoming a member of as chief government earlier than switching to UBS.
In the meantime, UBS has lent an extra $49bn to its purchasers over the previous 18 months, with extra specialised, higher-margin lending turning into a small however rising a part of the enterprise.
“Within the present surroundings, this technique is working and dealing properly,” stated a senior government at a rival Swiss financial institution. “However are they in a position to handle threat and cut back leverage if volatility picks up and there’s a sturdy correction available in the market?
“That is the proof we don’t but have and can inform us whether or not they’re doing a great job or not.”
The collection of scandals engulfing Credit score Suisse since Khan’s departure — together with the $5.5bn loss on the collapse of household workplace Archegos Capital and liquidation of $10bn of funds linked to specialist finance agency Greensill Capital — level to the risks of neglecting risk controls within the pursuit of worthwhile purchasers.
UBS has had its personal share of points. It was hit by $861m of losses from Archegos, having provided prime brokerage providers to the enterprise run by former hedge fund supervisor Invoice Hwang. And the choice of a French courtroom on September 27 over whether or not the financial institution ought to pay as much as €4.5bn in penalties for serving to wealthy purchasers evade paying tax additionally looms.
Whereas Elevate has produced sturdy outcomes for UBS up to now, critics are sceptical about whether or not it could possibly preserve going. “Elevate has been about grabbing low-hanging fruit up until now,” stated a former UBS government. “The massive query is, what’s subsequent?”
The plan to extend lending predated Khan’s arrival. However one of many first issues he did when he joined was persuade the group’s government board to increase extra credit score to UBS’s richest purchasers and provides them extra flexibility in buying and selling.
“Some folks will say you guys are pushing lending now,” stated Naratil. “We don’t push lending — our purchasers borrow. They only don’t borrow as a lot from us as we want.”
Final yr Khan poached considered one of his senior lieutenants at Credit score Suisse, Remi Mennesson, to steer a brand new world financing crew at UBS, which straddled the wealth administration enterprise and funding financial institution.
The UBS crew was set as much as supply a quicker service to its richest purchasers, but in addition to discover extra refined lending. Slightly than conventional types of credit score, similar to mortgages and Lombard lending — which use the borrower’s listed securities as collateral — the so-called structured loans that Mennesson’s unit specialises in use illiquid property, similar to stakes in personal firms, as collateral.
Although such loans can command larger rates of interest for the financial institution — as much as double earned from Lombard lending — they’re additionally riskier.
Nearly all of UBS’s lending to wealthy purchasers has taken place within the US, the place Naratil stated UBS is discovering extra demand for specialised lending.
“Increasingly wealth is created from entrepreneurs within the new economic system and corporations staying personal for longer,” he added.
Khan had centered Credit score Suisse’s lending technique on extending credit score to the financial institution’s rich Asian purchasers. Among the many recipients was Lu Zhengyao, chair of Chinese language Starbucks rival Luckin Coffee.
Thiam as soon as feted Zhengyao as a “dream shopper” and “completely the poster baby for what we need to do”. Credit score Suisse had sponsored Luckin’s IPO in Could 2019 however when Luckin Espresso’s shares plunged 82 per cent final April following allegations of a $310m fraud, Zhengyao’s household firm defaulted on a $518m margin mortgage. Credit score Suisse was considered one of a handful of banks that offered the syndicated mortgage.
UBS has provided comparatively few structured loans up to now, accounting for lower than 5 per cent of the $49bn of gross loans offered this yr. Against this, round 1 / 4 of Credit score Suisse’s wealth mortgage ebook is in structured lending.
Nonetheless, in one other ill-fated deal, each UBS and Credit score Suisse, together with JPMorgan, collectively provided WeWork co-founder Adam Neumann a $500m personal loan that used his WeWork stake as collateral earlier than the group’s failed IPO in 2019.
Since Ralph Hamers changed Sergio Ermotti as UBS chief government 10 months in the past, he has presided over a interval of sturdy progress, although analysts and shareholders have been underwhelmed by his lack of grand technique.
Khan and Naratil, nevertheless, again Hamers, saying their enterprise has benefited from his give attention to placing purchasers’ wants first and enhancing effectivity by way of digitisation.
However at one stage all three had been combating for the highest job. And the success of Elevate will stand Khan and Naratil in good stead when the place subsequent turns into open — but when the dangers show unmanageable then the pair might additionally fall.