When did the black money case begin?

The pistolero

Sergio Ermotti has recently been on Twitter. There he reached 2,300 followers. And likes to fire salvos: "No truth to this @manager_magazin story" is what the top banker says about an article in the medium mentioned. Conversely, he praised an NZZ call for the financial center to resist pressure attempts from abroad. “Must read”, says the Ticino.

Ermotti recently demonstrated what that means, resistance. Instead of being chased by French prosecutors and agreeing to a sale of indulgences, UBS ventured into the Paris court arena. And said there: UBS had by no means systematically helped rich French people with tax evasion. The plea failed. UBS will have to pay the French state 4.5 billion euros if the verdict remains.

But Ermotti would not be Ermotti if he had not immediately appealed against the judgment. In the end, "justice would prevail," the manager said in a message to his almost 70,000 employees.

For him personally, the affair has no negative consequences. On the contrary, the 58-year-old received a total of 14 million francs for the past financial year. This makes him one of the top earners in the country. His income adds up: In the eight years as UBS boss, Ermotti earned a total of 94 million francs - a fabulous sum.

However, whoever criticizes his income will be disgraced by Ermotti. This happens not only to journalists, but also to the former Deputy Chairman of the British Federal Reserve, Paul Tucker. He argued with Ermotti at a conference about high bonuses in banking. Whoever found this wrong, was eaten away by envy, told the Swiss bank chief to the ex-central banker.

The hard deal: it is surprising given the results achieved.

The question

UBS is more stable and more profitable than its Swiss rival, Credit Suisse. But the track record of the largest Swiss bank under its long-term boss is not intoxicating. The results do not show a sustained upward trend, but fluctuate greatly from year to year.

Ermotti took over the helm at the end of 2011. In 2012, UBS made a loss, as often happens after a change of boss: minus 2.5 billion francs. In 2013 and 2014, things went up again, when the bank achieved a profit of 3.2 and 3.5 billion francs, respectively. In 2015, the net profit shot up to 6.2 billion, only to land at 3.2 billion a year later. In 2017, only 1.1 billion remained, in 2018 it was 4.5 billion, now in US dollars, the new UBS accounting currency.

The ups and downs are one reason investors avoid the bank. UBS shares lost 32 percent on the stock market last year. The paper currently fluctuates between 12 and 13 francs. It hasn't gotten anywhere for ten years.

To explain this, Ermotti and his colleagues refer to the general unpopularity of European bank stocks. But that's too easy. On average, these banks only lost 28 percent last year. So UBS is lagging behind the competition. And this despite the formidable starting position: She is the largest asset manager for wealthy private clients in the world.

Why is Ermotti still in the saddle?

The beginning

Born and raised in Lugano, Ermotti completed an apprenticeship at Cornèr Bank there. His career led him to the US investment bank Merrill Lynch and the major Italian bank Unicredit, where he became Deputy CEO in 2007. In this position he was jointly responsible for the major offensive in Eastern Europe, with acquisitions of banks whose credit positions became a problem during the financial crisis. Ermotti's boss had to vacate his place in 2010, and a little later Ermotti was gone too.

The father of two went looking for a job - and found what he was looking for at UBS. That was in April 2011. Ermotti became head of the expanded European region: a position without a lot of responsibility, suitable for newcomers. Ermotti quickly indicated that he was made for something bigger. On the very first day he told the boss at the time, Oswald Grübel, that he wanted to be his successor one day, legend has it. The hardened brooding obviously took the announcement calmly. The new guy should first show what he's capable of.

There followed tormenting months and an unexpected drama. Grübel had failed with his strategy of making UBS a leading force in the retail business again after its near-death experience in 2008. His plan was to increase profit before tax to 15 billion Swiss francs. But the German, who had experienced more storms in big banking than any other Swiss banker, was wrong. The world was not the same after the crisis. Grübel needed a new plan.

Then came the Adoboli case. A young trader in London was betting on big profits with UBS money. If he was wrong, he doubled the stake - until he could no longer. In September 2011 the matter was exposed: a loss of over two billion francs. Brood threw down the begging.

Who would take over? Ulrich Körner, the head of operations at the time, made it clear in those autumn days that he saw himself as the new CEO. But the UBS board of directors couldn't warm to him; he was too controversial as a person. Then there was Jürg Zeltner, head of asset management. The board of directors did not yet trust him to take the step. It remained: Ermotti.

What he had was: ambition, confidence, charisma. Kaspar Villiger, then UBS President, began to warm to Ermotti, although the losses at Unicredit were partly on his account. So the Ticino became the new boss. At first only on an interim basis, then definitely.

The strategy

Ermotti was there. At the age of 51 he became CEO of a major bank. In the months that followed, the confident manager continued what Grübel had set up. In October 2012, a year after his freestyle, he presented the new plan: Acceleration. The UBS investment bank should no longer place its own bets, but instead provide services for wealthy private clients: it is better to support companies in mergers and IPOs than to build up risky trading positions themselves.

The plan met investors' tastes. He made an acquaintance of Merrill Lynch to head his domesticated investment bank: Andrea Orcel. For him, Ermotti reached deep into the box. Orcel received an impressive 25 million francs as a transfer fee. But the commitment paid off. With the exception of one diver, Orcel's division was to generate steady profits in 2014 with a crew down to 5000 bankers.

It was the time when Ermotti seemed to be doing everything right. Especially in comparison to the competition: In 2014, Credit Suisse was forced to pay a fine of around $ 2.8 billion for illegal money offenses in the USA and got a guardian from Washington who had the last word on all transactions of the second largest Swiss bank had.

All the better for Ermotti, who now saw all the trumps with himself. His bank had long since had its US black money case and had gotten off cheaply in Germany as well. After self-disclosures in the Libor scandal, a new zero tolerance applied internally. Axel Weber, the new president and former head of the German central bank, offered a guarantee that UBS was serious.

So the high pay came naturally. While Ermotti's compensation was below 9 million in 2012, it rose to around 11 million francs in 2013 and 2014. In 2015, the leap over the 14 million mark took place. There, high up, the remuneration of the UBS flagship has remained to this day.

But Ermotti's income is detached from performance. The first to come to this conclusion was UBS's largest shareholder: GIC, one of Singapore's two sovereign wealth funds. He had become the bank's most important investor in 2007 when the bank lost billions in the US real estate crisis. The entry was made at a share price of just under CHF 44.

Two years ago, GIC decided to turn its back on the bank. And sold a significant part of the shares - at a price of around 16 francs. Those responsible announced that they were “disappointed”.

The fact that the rescuer from Asia left frustrated ten years after her billion-dollar commitment should have given the UBS management something to think about. But it didn't. UBS officials quietly indicated that the relationship would have cooled regardless of the share performance. Unsatisfied with our performance - that can't be.

Instead of questioning himself, Ermotti took care of internal opponents like Jürg Zeltner. The Bernese had climbed the corporate ladder for three decades and began to harass Ermotti's position. In 2017 he had to go. The maneuver was risky and required an explanation.

Ermotti delivered these in early 2018 with an internal merger. Asset management in America was merged with that of the rest of the world. This was previously led by Zeltner, a declared opponent of the merger. Instead of him, two confidants of Ermottis took over the co-management of Global Wealth Management. These should quickly release synergies.

However, there was initially no personnel adjustment. Almost all top executives of the previously separated divisions kept their posts, the co-management continued on to the second and third management level. No costs could be saved in this way. In order to still achieve the goals, the more people in the middle management and in the “engine room” had to be laid off. A whole hierarchy level disappeared, which affected the mood.

The balance

Are at least the results of the new Superdivision correct? Not really until now. Profitability is stagnating: The adjusted pre-tax result recently fell from 4.2 billion to 3.7 billion dollars. The new unit also performs unsatisfactorily in terms of the most important efficiency measure, the ratio of costs and income. It rose from 74 to 78 percent in 2018. For every dollar earned, it cost almost 78 cents.

In the new set-up, UBS is therefore producing more expensive than before. The problem of asset management is the USA: a lot of customer money has flowed out there in the past two years. It remains to be seen whether the trend reversal will succeed.

The same applies to the entire bank: earnings are stagnating. And the costs are not falling, but remain high - especially for staff and management. Regardless of how good or bad a year is, it turns out that the UBS elite continue to benefit from proud compensation.

Five years ago, in 2014, the ten-strong management team was paid salaries totaling CHF 80 million. That's 8 million per person. In 2018 there were 13 people on the management board. A total of 101 million francs flowed - still almost 8 million per capita.

The extended management team is also constantly spoiled: the top percent of the staff, called key risk takers. In 2014, 615 of them earned an average of 1.92 million francs. In 2018, in a year with a miserable final quarter, 675 risk takers came to an average of 1.85 million francs. Almost unchanged amounts - year after year.

The only people who actually take risks at UBS are the shareholders. The bank will have to face them at the Annual General Meeting on May 2, 2019.

To keep the owners happy, UBS bought its own shares from the stock exchange last year; a typical approach to increasing the value of the remaining shares. The action was crowned with moderate success, as can be seen from the course. According to observers, the bank is likely to crawl back in 2019 and refrain from further share purchases. This also because of the impending buses from France. UBS has only put a few hundred million dollars in provisions for the litigation, which could cost billions of dollars.

The two big banks in the Swiss financial center not only lacked the momentum, but also “the impetus”, so the conclusion of the financial press.

UBS has been saying to investors for years that it wants to «improve effectiveness», «invest in growth», «to take advantage of the early movers Capitalize ». However, if there are slight uncertainties in the global economy, as in the last two quarters, it becomes clear that the business model of the Swiss flagship financial institution is as volatile as ever.

UBS counters and points out in a statement that the bank has made a total of 19 billion dollars in net profit since 2014, although it had to spend almost 9 billion on legal matters and regulatory requirements during this time. "UBS is in very good shape and one of the best capitalized banks in the world." The return is high, over 13 percent.

The conflict leaves experts at a loss. Rainer Skierka, an independent analyst at Research Partners in Zurich, attests to UBS that it is more stable than German or English banks. In addition, the environment is difficult for all international financial institutions. Nevertheless, the question of the future arises. "How can UBS align itself so that it generates reliable income and makes reasonable profits?"

Javier Lodeiro, an analyst at Zürcher Kantonalbank, estimates that UBS is basically set up correctly: with strong asset management and a complementary investment bank. "For UBS to be the world's number one in private banking, the results would have to be better." There would be a need for adjustments, especially in terms of costs.

Ermotti takes the position that UBS will be beaten below its value on the stock exchange. To underline this, he demonstratively took action a few months ago. He bought shares in his bank for 13 million francs as a private investor. Look here, so the message: UBS is a purchase.

Ermotti does not get through to the market. In the bank, yes. Why?

The character

A cadre praises him as a tough but fair leader who has learned the banking business from the bottom up and understands it à fonds. "Sergio is incredibly disciplined, he prepares meticulously for meetings, goes through the list of topics in a structured manner, point by point." Those who have not kept their promises will not get away with him. "Looking for a lazy excuse or blaming a colleague, Sergio never accepts that."

Great respect comes from the man's words. Ermotti is also liked in the financial center. For example from Konrad Hummler. He, who worked for UBS's predecessor bank SBG for a long time, praised Ermotti as “highly intelligent”. He understood banking well and knew what risks were. "And this is what he does too." Or by Hans Geiger, a former top man at the credit institution and later a bank professor. "Ermotti has remained down to earth, he has little fear of contact and is not afraid to turn to the wind with unpopular statements," he says.

Stand in the wind: This is probably where Ermotti's greatest talent comes to the fore. The top banker - not unlike US President Donald Trump - has a type that polarizes but is all the more appreciated by fans. Because he doesn't look lifted and polished, but like someone from very ordinary circumstances who has made it to the top.

The good image is carefully maintained. Ermotti is well connected in the media. With «Weltwoche» -owner Roger Köppel he is by you; “Bilanz” editor-in-chief Dirk Schütz regularly exchanges information with the UBS boss, and the business magazine reports benevolently on Ermotti.

At Medienhaus Ringier, his confidants even sit on the top management: Lukas Gähwiler, who headed UBS Switzerland for a long time, is a member of the board of directors. Likewise Claudio Cisullo, an IT entrepreneur who, under Ermotti's leadership, was able to take over the purchasing department at the financial multinational and later founded his own purchasing company with the help of UBS orders.

Ermotti not only takes action behind the scenes, but also as a front man. The Swiss would have to prepare for longer work, he said in an interview: They should only retire at 70 or 72. On another occasion, he criticized SNB President Thomas Jordan, although this is actually not appropriate for corporate bosses. But Ermotti doesn't care about conventions. And emphasizes that the greatest threat to Switzerland is not CS and UBS, but the National Bank and its large balance sheet.

The attitude impresses many. Ermotti looks attractive: the suit fits, the hairstyle is elegant, the voice is sonorous. A dash of Italian in the English business talk provides additional appeal. Ermotti dominates the performance, is a welcome guest on Bloomberg and CNBC, the American financial TV channels. When the camera is running, the top UBS man leans back and relaxes in the armchair. The mischief flashes in his chestnut brown eyes, everything is waiting eagerly for surprising news or an upbeat statement from the mouth of the most famous Swiss banker.

Ermotti pulls quickly, shoots sharply.It is no coincidence that his private hero is a western comic figure from Italy: Tex Willer, a cowboy who teaches villains how to fear and knows how to use a pistol as well as his fists. A Lucky Luke with less humor, but more toughness. That Willer's pose has done it to Ermotti fits into the picture. Both exude the coolness and callousness of superior duelists: Don't mess with me.

When it comes to his person, Sergio «Tex» Ermotti has no joke. At the beginning of the year, a US news agency made public that UBS was conducting job interviews with potential CEO candidates - later “Manager Magazin” duplicated it with an article about the management board, in which there was no capable successor. Ermotti gave the renowned business magazine a reply via a court decision.

Internally, Ermotti doesn't let anyone by: Numbers two and three in the pecking order, Jürg Zeltner and Andrea Orcel, lost out in the power tussle. Zeltner was dumped at the end of 2017, Orcel went out on his own last autumn because he saw better career opportunities in Spain.

This is another reason why Ermotti is now the sole master of the large UBS house: because as an alpha male, he dominates everything. There is no longer anyone in the management who could dispute his CEO job: Nobody on the 13-member committee is even trusted to succeed Ermotti. Ermotti recently commented on rumors that UBS was looking for a new boss that he could well imagine staying until 2022.

The ranks are closed. Not a peep against the boss who has been in charge of the largest Swiss bank for eight years. Anyone who resists has long since been put out of the way. What remains are executives who cannot pose a threat to him: Sergio Ermotti, the pistolero of the Swiss financial sector.

To the author

Lukas Hässig is a financial journalist and operator of the “Inside Paradeplatz” portal. He has been writing about the financial industry for many years and is the author of a book about the UBS crash. Hässig has already written about "The Vincenz System" for the republic.