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(Bloomberg) -- UBS Group AG sees bank profits under pressure as European regulations force lenders to charge for research, breaking apart a decades-old business model that’s prompted a race to provide the cheapest offering.
“It will be challenging and it will be rocky” Andrea Orcel, head of UBS’s investment bank, said of the impact of the MiFID II directive in a Bloomberg Television interview. “Everybody has run scenarios but I don’t think anybody, either an investment bank or a client, will tell you they have it figured out.”
The revised Markets in Financial Instruments Directive is causing tumult as banks and money managers struggle to price research previously bundled with other services. The European Union’s plan is to ensure more investors act in the best interests of their clients and aren’t induced by free analysis. While banks try to figure out what the market can bear, money managers -- unused to paying -- are now weighing what research they really need.
How Do You Put a Price on Investment Research?: QuickTake Q&A
In a wide-ranging interview, Orcel spoke about the previous five years overhauling UBS’s investment bank, the challenges posed by Brexit, finding profitable growth, banker compensation and how some clients don’t understand the Zurich-based bank’s pivot to wealth management.
Orcel likened the bank’s model for pricing its research to that of a phone company that makes most of its money from the more expensive data and other services on top of clients’ basic bill. Similarly, he said, UBS plans to build its pricing around a basic research package which would probably cost “thousands or tens of thousands” of dollars and then charge extra for value-added services such as access to the bank’s analysts.
There’s wild variations in the market so far. JPMorgan Chase & Co. is proposing to charge $10,000 a year for read-only access to research on stocks, undercutting the 30,000 pounds ($39,000) Barclays Plc has proposed for a similar package and UBS itself about $40,000, according to people with knowledge of the matter. At the top end, Barclays has also quoted 350,000 pounds ($450,000) for firm-wide access to its premium offer for equities.
Orcel’s overhaul since 2012 has ensured more regular profitability at the bank and may allow the world’s largest wealth manager to better offset threats such as MiFID. UBS has paired back the business to focus on more stable wealth management revenues, leaving Orcel running a slimmer unit based around deal advisory, equities and research. Last year it contributed just over a quarter of net revenues and 16 percent to UBS’s pre-tax profit.
With much of the restructuring at the business now out of the way, Orcel said he and colleagues are resisting the urge to cut prices to win market share because ultimately that won’t contribute to the bank’s bottom line and undo cost savings achieved so far.
“Most of the things that today are growing are either things where we don’t feel we have a capability to lead or where we feel we could lead but they’re not profitable enough,” Orcel said, highlighting prime brokerage as one area where the bank could potentially win market share. “So should I grow in those segments? For a while I would show a good trend in my revenue line but what would the consequences be on profits.”
The investment bank -- which currently uses about 9.5 billion francs of equity -- would probably have no issue in obtaining a further one to three billion dollars of capital at the group level if it asked for it, Orcel said. The problem is knowing what to do with it.
“When I ask my colleagues on the executive committee of the investment bank they say ‘I could do a little more here and there but I really want is budget for technology or for hiring more people,’” Orcel said. “I am absolutely confident that if I had a profitable way to deploy another 1, 2 or 3 billion I would have no problem in obtaining it from the group.”
MiFID isn’t the only major challenge on Orcel’s horizon. The bank is also weighing where to locate jobs on the European continent as the U.K. leaves the European Union and is still considering locations including Frankfurt, Amsterdam and Madrid. He reiterated that a key part of the bank’s decision-making is deciding on a location where people want to live.
“Depending on the location a lot of people may either not move, move to another bank that chooses a better location or leave the industry,” Orcel said. “Every financial institution affected by this is running scenarios.”
Orcel also touched upon China and banker compensation, arguing the latter is becoming “frothier” again in the U.S. as banks compete for talent. Regulation - which was a necessity for banks after the financial crisis -- has now become “tight,” he said.
At the group level, the extra regulatory burden was reflected in a surprise drop in UBS’s CET1 ratio, a key measure of financial strength, in the second quarter. That was partly because of extra demands from Swiss regulators.
“You could argue to bring the pendulum a little bit back,” he said. “Nobody -- not even the regulators -- are arguing it needs to be tighter.”
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