How UBS Can Cash In After Its $2.3 Billion Debacle

Analysis: After last week’s arrest of a rogue trader accused of fraud that cost the Swiss bank $2.3 billion, UBS shareholders could actually wind up benefiting from a new structure that splits off the investment banking from the commercial business. But t


ZURICH - It is time for UBS to rethink its business model. More precisely, it needs to get rid of its investment banking operations, the business that makes it easy to lose in seconds what an entire crew of asset managers and consultants have earned from a hard day's work. After last week's arrest of Kweku Adoboli, 31, charged with fraud and false accounting dating back to 2008 that racked up $2.3 billion in losses, even the Neue Zürcher Zeitung, a Swiss paper known for its sobriety, asked, "Splitting Off Investment Banking Wings: The Solution To Uncontrollable Proprietary Trading?"

The argument is as follows: It simply isn't right that the more stable commercial banks – or God forbid, the taxpayers – should make up for the billions squandered away by traders in London and New York. Especially when the soaring profits the traders make merely flow back into their own salaries. Discontentment is growing, even within the banks themselves. "It's the investment bankers," says a wealth manager at UBS Zurich, "they ruin everything."

The pressure on banks has been growing for years, and increased significantly after the financial crisis forced the Swiss state to take UBS under its wing. Nevertheless, the bank has yet to abandon its integrated model. "The reason is simple," say banking expert and author René Zeyer. "A separation would be good for shareholders but bad for the traders themselves." They would have to carry their own risk. And the top managers at the commercial bank would have to accept more regular, but significantly lower bonuses.

Even Konrad Hummler, managing partner at Wegelin & Co, pointed out that the high wages in the investment banking groups has influenced the rest of the industry. "The direct impact for us is a higher salary expectation in the financial industry," he said. There is little incentive for bank managers to separate from the risk-intense business.

Lower returns, higher shares

However, a study conducted by the JPMorgan Research Department suggests that investors are likely to benefit from a split within the bank. The investment banking business , according to market observers, contributes little to the long-term value of the bank; and a split, which would lower both risk and capital gains, would also increase the price of UBS shares.

René Zeyer predicts the same. He calculated the potential for returns without the investment banking group at around five percent – significantly lower than UBS Chief Oswald Grübel's fantasy of 15 percent. "It would be an honest and sustainable growth," said Zeyer. He is convinced that investors would have great confidence in a bank that chose to leave the current circus of the financial industry. "This bank's stocks would be as prized as the Matterhorn (mountain peak)," he said, "and their value could double."

Defenders of investment banking argue that their sector provides important services to the bank. After all, the group does more than just high-risk proprietary trading. The consultants also put together and sell packages that enable the funding of mergers or expansions. A large Swiss company, for example, can turn to investment bankers to obtain new bond money for a buyout in India.

UBS could continue its investment banking activity, and simply let go of its proprietary trading. Or it could look for new, independent investment banking services. This would have the advantage of forcing investment bankers to convince more asset managers of their performance before they invest large amounts of client money. "Because of cheap financing from retail banking and wealth management," we have taken on too much risk, says Hummler. Separating the investment bank would make transactions more expensive, but it would also make them safer.

Read the original article in German

photo - twicepix

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!

How China Flipped From Tech Copycat To Tech Leader

Long perceived as a country chasing Western tech, China's business and technological innovations are now influencing the rest of the world. Still lagging on some fronts, the future is now up for grabs.

At the World Semiconductor Conference in Nanjing, China, on June 9

Emmanuel Grasland

BEIJING — China's tech tycoons have fallen out of favor: Jack Ma (Alibaba), Colin Huang (Pinduoduo), Richard Liu (Tencent) and Zhang Yiming (ByteDance) have all been pressured by Beijing to leave their jobs or step back from a public role. Their time may be coming to an end, but the legacy remains exceptional. Under their reign, China has become a veritable window to the global future of technology.

TikTok is the perfect example. Launched in 2016, the video messaging app has been downloaded over two billion times worldwide. It has passed the 100-million active user mark in the United States. Thanks to TikTok's success, ByteDance, its parent company, has reached an exceptional level of influence on the internet.

For a long time, the West viewed China's digital ecosystem as a cheap imitation of Silicon Valley. The European and American media described the giants of the Asian superpower as the "Chinese Google" or "Chinese Amazon." But the tables have turned.

No Western equivalent to WeChat

The Asian superpower has forged cutting-edge business models that do not exist elsewhere. It is impossible to find a Western equivalent to the WeChat super-app (1.2 billion users), which is used for shopping as much as for making a medical appointment or obtaining credit.

The flow of innovation is now changing direction.

The roles have actually reversed: In a recent article, Les Echos describes the California-based social network IRL, as a "WeChat of the Western world."

Grégory Boutté, digital and customer relations director at the multinational luxury group Kering, explains, "The Chinese digital ecosystem is incredibly different, and its speed of evolution is impressive. Above all, the flow of innovation is now changing direction."

This is illustrated by the recent creation of "live shopping" events in France, which are hosted by celebrities and taken from a concept already popular in China.

10,000 new startups per day

There is an explosion of this phenomenon in the digital sphere. Rachel Daydou, Partner & China General Manager of the consulting firm Fabernovel in Shanghai, says, "With Libra, Facebook is trying to create a financial entity based on social media, just as WeChat did with WeChat Pay. Facebook Shop looks suspiciously like WeChat's mini-programs. Amazon Live is inspired by Taobao Live and YouTube Shopping by Douyin, the Chinese equivalent of TikTok."

In China, it is possible to go to fully robotized restaurants or to give a panhandler some change via mobile payment. Your wallet is destined to be obsolete because your phone can read restaurant menus and pay for your meal via a QR Code.

The country uses shared mobile chargers the way Europeans use bicycles, and is already testing electric car battery swap stations to avoid 30 minutes of recharging time.

Michael David, chief omnichannel director at LVMH, says, "The Chinese ecosystem is permanently bubbling with innovation. About 10,000 start-ups are created every day in the country."

China is also the most advanced country in the electric car market. With 370 models at the end of 2020, it had an offering that was almost twice as large as Europe's, according to the International Energy Agency.

Photo of a phone's screen displaying the logo of \u200bChina's super-app WeChat

China's super-app WeChat

Omar Marques/SOPA Images/ZUMA

The whole market runs on tech

Luca de Meo, CEO of French automaker Renault, said in June that China is "ahead of Europe in many areas, whether it's electric cars, connectivity or autonomous driving. You have to be there to know what's going on."

As a market, China is also a source of technological inspiration for Western companies, a world leader in e-commerce, solar, mobile payments, digital currency and facial recognition. It has the largest 5G network, with more than one million antennas up and running, compared to 400,000 in Europe.

Self-driving cars offer an interesting point of divergence between China and the West.

Just take the number of connected devices (1.1 billion), the time spent on mobile (six hours per day) and, above all, the magnitude of data collected to deploy and improve artificial intelligence algorithms faster than in Europe or the United States.

The groundbreaking field of self-driving cars offers an interesting point of divergence between China and the West. Artificial intelligence guru Kai-Fu Lee explains that China believes that we should teach the highway to speak to the car, imagining new services and rethinking cities to avoid cars crossing pedestrians, while the West does not intend to go that far.

Still lagging in some key sectors

There are areas where China is still struggling, such as semiconductors. Despite a production increase of nearly 50% per year, the country produces less than 40% of the chips it consumes, according to official data. This dependence threatens its ambitions in artificial intelligence, telecoms and autonomous vehicles. Chinese manufacturers work with an engraving fineness of 28 nm or more, far from those of Intel, Samsung or TSMC. They are unable to produce processors for high-performance PCs.

China's aerospace industry is also lagging behind the West. There are also no Chinese players among the top 20 life science companies on the stock market and there are doubts surrounding the efficacy of Sinovac and Sinopharm's COVID-19 vaccines. As of 2019, the country files more patents per year than the U.S., but far fewer are converted into marketable products.

Beijing knows its weaknesses and is working to eliminate them. Adopted in March, the nation's 14th five-year plan calls for a 7% annual increase in R&D spending between now and 2025, compared with 12% under the previous plan. Big data aside, that is basic math anyone can understand.
Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!