Awards for Excellence 2014: Orcel’s new spin on old-style investment banking

Lots of people in the industry will tell you they always wanted to be an investment banker. Few mean it like Andrea Orcel does. His thesis at university was on investment banks and what they do for their clients.

“I’ve always thought that the purpose of investment banks changed for the worse since the repealing of Glass-Steagall,” Orcel says. “When you combine commercial and investment banking, the latter risks becoming polluted by objectives that have nothing to do with its core values and services: financial advice, capital intermediation and securities execution. Once you subsidize one activity to benefit another, it’s very hard to run a business that is in itself both value-adding to clients and profitable. Investment banking then risks becoming just about maximizing revenues and product suite. That was never the right model, and is certainly not the right model today.”

It was a surprise when Orcel joined UBS from Bank of America Merrill Lynch in July 2012, first as co-CEO of the investment bank with incumbent head Carsten Kengeter, taking sole charge in November 2012. While at Merrill, he was arguably the highest-profile dealmaker in Europe. Clients loved him – the likes of Emilio Botin, chairman of Spain’s Grupo Santander, would not do a deal without him. But the doubters – and there were many – asked: how can Orcel make the transition from dealmaker to manager, least of all at an investment bank that had already announced its intention to dramatically cut back its business?

Orcel says he had long admired UBS. “The firm was always one of the strongest competitors, client focused and excellent in advisory, equities and some areas of FICC; all naturally underpinned by the wealth management franchise,” he says. “However, it expanded excessively across FICC, and relied too much on balance sheet. Both resulted in excessive risk, low profitability and ultimately substantial value destruction.”

Never shy

Orcel and Sergio Ermotti were old colleagues from Merrill Lynch days. While Ermotti was at UniCredit from 2005 to 2010, the pair occasionally met for dinner and discussed the malaise affecting the investment banking industry.

Orcel was never shy in espousing his view on what had gone wrong. “I used to compare commercial and investment banking with him. Commercial banking is similar to Wal-Mart but investment banks should be more like Louis Vuitton. Sure, supermarkets make more money and some are dominant in their markets, but if you get the luxury goods sector right the returns can also be phenomenal. In my opinion it is a risk to merge the two without being very careful not to mix the different DNAs – why would you put designer handbags between potatoes and tomatoes and run these businesses identically?”

When Ermotti became CEO of UBS, he knew he had to take tough decisions on the investment bank. After listening to Orcel’s views on how an investment bank should operate, he gave Orcel the opportunity to put his views to work.

Orcel says that up to that point UBS had been ‘salami slicing’ the investment bank, reducing business lines piecemeal. More was needed. He was fully behind the Accelerate project that Ermotti announced in October 2012. “Contrary to other people, Sergio believed that precisely because of my background as a client focused investment banker I could execute an aggressive repositioning of the investment bank. I pointed out that many would doubt our model but that it would work and eventually be embraced by all stakeholders if we delivered consistently over a long enough period of time. This is still my hope today.”

That strategic decision gave UBS no choice but to compete in a different way. “There are two different models now,” says Orcel. “And both are credible. One is to be the biggest, lead with size and force, product suite and balance sheet. The other is to be much more focused, smaller, lead with relationships, intellectual capital and technology. We are not going to be one of the top eight or nine global investment banks by revenue. But we can be the most highly valued in terms of multiples and, in my opinion, an investment bank of excellence in the areas we have chosen to compete.”

For many years during the crisis, UBS’s investment bank was a terrible place to work. Many talented bankers gave up and left. It was tough for Orcel at the start. For the first six months he stayed behind the scenes, talking to key individuals and taking the pulse of the business. The first major announcement under his watch, at the end of 2012, was a tough one: not only were 25% of jobs to be cut, but bankers would get paid around 50% less on average as well.

But Orcel says the new strategy means that, for the first time in a long time, people want to stay, and they want to join as well.

“We have to win business in our own right,” he says. “We don’t have the biggest platform, nor the balance sheet to fall back on. No one will give us business just because we are here. But if we do well it is because clients trust each one of us as individuals, the team we are part of and the quality of our advice and execution.”

How does Orcel keep and attract bankers at a firm, which is, by its own CEO’s public statements, some way down the list of priorities for the group as a whole, behind not just wealth, but its overall business in Switzerland as well as global asset management? “It’s a positive,” he surprisingly enthuses. “We have close to 12,000 in the investment bank who want to succeed as a team, add substantial value to clients and the rest of the UBS group.”

You sense that Orcel is driven to prove that his investment bank can be at least an equal partner in the overall business. He’s determined that it should compete on hard work, the quality of its advice, and in technology, where he knows he might have to fight for the spend to keep up with the old-style giants of investment banking.

The energy that he is so well known for is there – not just for his clients, but for his business as well. He’s proud that the investment bank produced a return on attributable equity for 2013 of more than 30%, and wants to tell you that this is a better margin than the core wealth franchise was able to achieve. He thinks that within the confines of SFr8 billion of capital, with low VaR and limited risk-weighted assets, a return on equity of 30% is achievable over the long term from client-driven revenues. On this basis, he thinks, the investment bank could account for closer to 30% of group profit in the future, rather than the 20% (on 30% of total capital) that senior management says is the targeted mix.

Orcel cannot resist name-dropping the well-known figures in the finance industry, off the record of course, that tell him his team is outperforming, giving him the confidence that those client driven revenues will continue to grow.

There remains something of the pirate about Orcel, and outsiders will continue to wonder how he will fit long term in a team of disciplined, well trained captains and lieutenants.

But Orcel is clear of his place in the scheme of things, and the course that UBS continues to need to take. “We have a common purpose: keep building an investment bank of excellence in the businesses we have targeted. Our investment bank is well diversified and capital light, underpinned by intellectual capital and leading technology, and is synergistic to our leading wealth management franchise. I am convinced that this is the right strategy and the right model.”