It seems to be de rigueur these days, when a company is in the doghouse, to call for it be broken up. The latest target is UBS, the Swiss investment bank which is also the world’s largest wealth manager. There is no real chance that it will take such advice. And if UBS has got its business model wrong, it bodes ill for other investment banks that have been building and buying private banking and asset management operations.
But surely investment banking and private banking are a natural fit? In the world’s fastest growing markets, the development of capital markets and the increase in personal wealth are interlinked. Arranging an initial public offering then managing the proceeds for the seller has obvious synergies: UBS estimates that between 8 and 9 per cent of new referrals to its private bank come from its investment bankers. And banks are relying on new business in the Gulf, Russia and Asia, where corporate and private (and state) wealth overlap, to boost their earnings growth.
Institutional asset management is, on the face of it, harder to justify. For one thing, tight regulatory restrictions to avoid conflicts of interest prevent banks from exploiting potential synergies. In fact, owning both investment banking and asset management operations brings the extra cost of keeping the businesses separate. This, though, is a better argument against buying asset managers at high prices than for selling existing businesses. At the very least, success in investment banking, asset management and private banking helps create strong brands and attract the talented staff vital to all three.
Still, UBS and others trade at a discount to their sum-of-the-parts valuations, suggesting that investors are not giving them full credit for resilient private banking earnings. Some banks certainly have to work harder to demonstrate that they are not becoming too large to be managed effectively: avoiding snarl-ups such as UBS’s recent hedge fund problems would help. Despite the debate about size and shape, industry executives, rightly, seem intent on building up private banking.