By Owen Wild
LONDON, Nov 1 (IFR) - UBS
They had hoped that the IPO business would tide them through a difficult period, but listing activity has been restrained and ECM operations have suffered as a result.
Recent third-quarter numbers show that the collapse in revenues has been pretty much across the board in Europe. In its third-quarter results, Credit Suisse declared that its equity underwriting revenues were down 16.8% for the first nine months of the year, with the quarter-on-quarter drop even starker at 51.9%. Deutsche Bank's numbers were similar, with a fall from equity underwriting of 28% in the first nine months.
But UBS was by far the worst hit of the major banks. Over the first nine months of 2010, UBS earned SFr559m (US$567m) from ECM, down a massive 53.6% on the same period of 2009. On a quarter-on-quarter basis, the collapse was even more alarming. Its revenues were just SFr90m - down 82% on the previous quarter's SFr500m.
Humiliatingly, those numbers mean that that UBS made less from equity underwriting than rival Swiss firm CS in the nine months to end-September. CS brought in SFr604m. UBS missed out on some of the quarter's biggest stock sales. It was absent, for example, from the IPOs of Agricultural Bank of China and Petrobras in Brazil and the follow-on offer from Mizuho in Japan.
The one major deal it was involved in - the US$6.5bn sale of China Mobile stock for Vodafone alongside Goldman Sachs and Morgan Stanley - led only to a massive loss. Bankers involved in the deal say that each of the trio lost some US$40m in that deal alone when they bid too aggressively and got stuck with massive amounts of stock.
"It was a large loss on a block and we shouldn't have taken it," said one insider. "But one thing some people don't realize about ECM is that league tables are important, so you have to be relevant."
The China Mobile trade secured UBS second spot in Asia-Pacific league tables.
In previous years, the bank faced little competition for blocks in Asia and made a consistent profit. Now everyone is chasing the same transactions and auctions are the norm.
UBS insiders are keen to point out that one reason for the precipitous fall is the comparison with a remarkable 2009. That year, UBS led the sale of 18bn of stock sold in Lloyds TSB/Lloyds Banking Group alone, as well as the SFr5.5bn government exit from its own shares.
Another factor is the growth in syndicate size and the pressure on fees. The IPO of Enel Green Power, which priced on October 30 to become the largest EMEA IPO of the year at EUR2.26bn, paid EUR36.2m on the base deal - but that had to be shared by 10 banks.
That situation is repeated in Asia and not just on the landmark deals. Companies are, wisely, maintaining relationships with several banks even before an IPO and as a result all get a share of the deal.
The main bright spot for UBS is how well it has done in the US, where its revenues actually increased in the year to date and its volumes leapt by more than a third. But the other key market for high fees - Japan - was a disaster for the bank. Estimates are that Japan, where issuance is up 54% year-on-year, has had an international fee pool of about US$1.5bn but UBS has missed nearly all of it.
The other markets where UBS has traditionally been strong are China, Brazil and Australia. Difficulties in each contributed to the dreadful numbers. In China, UBS saw its main rainmaker, the well-connected Henry Cai, jump ship to Deutsche and that had a predictable impact. In Brazil, the forced decision to sell its local unit Pactual to raise money in the aftermath of the financial crisis is now having a dire affect. The bank is only now rebuilding a decent presence in the country. In Australia, meanwhile, where UBS has long had a dominant presence, equity issuance was just US$12.7bn in the first three quarters of 2010 - down from US$45.4bn in the first nine months of 2009.
The bank's home region was just as badly hit, with ECM volumes for the whole of EMEA down 67% in the first nine months. Bankers feel they have been unlucky, with the year consisting of a series of small windows in which to price IPOs. UBS's transactions, such as the Travelport listing, have simply come at the wrong time.
However, those who have worked alongside UBS this year allege the firm often shows an overly aggressive streak when it comes to promised terms that makes it hard to rein in clients when markets are tough.
The focus for UBS's ECM team now is on compensation. For three years the ECM team has performed very well when other parts of the bank did not. In those years, bonuses reflected the bank's performance more than the team's. If the bank wishes to retain the talent that remains, then that situation may have to reverse in 2010.
