Sergio Ermotti: The quick fixer with a long game

Sergio Ermotti lacked a high profile when he took over UBS Keystone

In late September 2011, the high command of UBS gathered in Singapore for a series of crucial meetings. A week earlier, the Swiss bank had uncovered a $2.3 billion (CHF2.02 billion) loss caused by a rogue trader in London, and the lender’s leadership was under intense pressure to respond.

Among the executives jetting in was Sergio Ermotti, who landed in Singapore as head of UBS’s operations in Europe, the Middle East and Africa.

By the end of the week, UBS’s then chief executive, Oswald Grübel, had resigned following a clash with the board over strategic responses to the crises, and Mr Ermotti had replaced him. For someone who had joined just five months earlier, it was quite an ascent.

“For sure, I didn’t leave Zurich to go to Singapore that week thinking that I was going to come back as a CEO,” the dapper Mr Ermotti recalls, speaking at UBS’s plush headquarters on Zurich’s glitzy Bahnhofstrasse. “It was a mix of wow, OK, happiness. But also realising it would not be easy.”

That is probably an understatement. Quite apart from the rogue trading scandal, Mr Ermotti inherited an investment bank that was still struggling after writing off more than $50bn during the financial crisis. On top of this, the unit had already been drawn into the Libor investigation that would eventually saddle the bank with a SFr1.4bn fine.

Come back stronger

Yet despite the challenges, Mr Ermotti was confident that the bank could be turned around.

“If I have to tell you what was and is my mission: I think UBS can be the Apple or IBM of the banking industry, companies that went from being admired to severe difficulties and to being back stronger than before,” he says.

In October 2012, Mr Ermotti set about trying to achieve this, unveiling a plan to slash UBS’s staff by about a sixth, and to exit large parts of its fixed income trading business, leaving it with a smaller yet more focused investment bank.

The radical strategy pleased investors and even surprised long-time UBS employees used to incremental changes of direction.

Mr Ermotti says the plan had its genesis in a stricter regulatory regime and the rogue trading affair. But he con­cedes it was made easier to implement by the fact that neither he nor Axel Weber, who became chairman of UBS in May 2012 and whom some investors see as having heavily influenced the strategy, were UBS lifers.

Magical business

Indeed, Mr Ermotti might not have ended up in banking at all. Born in southern Switzerland in the Italian-speaking canton of Ticino, the Swiss- Italian left school at 15 and initially wanted to become a sports teacher.

However, after starting an apprenticeship at Cornèr Banca, a small private bank based in Lugano, he soon changed his mind.

“I joined the stock exchange department . . . and started to see what I would call the magic of this business, its global nature, how it is influenced by international events,” the multilingual banker says with his characteristic Italian accent. “So I realised, this is not as boring as I thought.”

After a stint at Citibank, he was hired by Marcel Ospel at Merrill Lynch in 1987, and spent the next 16 years working his way up through the bank’s equity and capital markets businesses around the globe. In 2005, he took over as head of Unicredit’s investment bank, before becoming deputy CEO in 2007.

After being passed over in a management reshuffle, he left the Italian bank in 2010, receiving a call from Mr Grübel the day his departure became public. Given UBS’s litany of woes and its tarnished brand, not every executive would have chosen to join in 2011. For Mr Ermotti, however, it was a chance to go home.

“As a Swiss-Italian who has always worked for foreign banks, there was clearly an element of pride going back to my roots and working for the biggest bank in my country,” explains the 53-year-old, who remains a keen skier and runs regularly to keep fit but without particularly enjoying it.

The CV

Born: Lugano, Switzerland, 1960.

Education:  Swiss Certificate of Banking, Advanced Management Programme (Oxford).

Career:

Apprenticeship at Cornèr Banca.

1987: joins Merrill Lynch and works in equity derivatives and capital markets.

2001: co-head of global equity markets.

2005: joins UniCredit

2007-10: deputy chief executive of UniCredit.

April 2011: joins UBS as chairman and CEO of UBS Europe, Middle East and Africa.

September 2011: appointed interim CEO after Oswald Grübel resigns.

November 2011: becomes CEO on a permanent basis.

Family: married, with two children.

Interests: skiing.

(Source: The Financial Times Limited)

Low profile

When he started as CEO, the jury was out not only on the bank’s future but also on Mr Ermotti himself, given that he still lacked a high profile among investors.

But the energetic banker was convinced that UBS had the ingredients of success, not least given the might of its wealth management operations, which – even after SFr200bn of outflows during the financial crisis – remain among the largest in the world.

His new strategy was designed to let UBS focus on these strengths by paring back those capital-intensive, risky parts of the investment bank that had never really succeeded. In an ironic twist, it took an ex-Merrill Lynch banker to finally bury the grand plan of another – former UBS chief executive Mr Ospel – to catapult the Swiss bank into the top global investment bank league.

A year and a half on, Mr Ermotti has convinced most investors by shrinking UBS’s risk-weighted assets (RWAs) – a measure that ultimately determines how much capital a bank must hold – faster than initially envisaged.

“They’ve made good progress,” says Chris Wheeler, an analyst at Mediobanca. “But if you look at their legacy and non-core businesses, these still accounted for 28.2 per cent of UBS’s overall RWAs at the end of 2013. That’s obviously partly due to the fantastic job they have done in bringing down RWAs elsewhere in the business, but it shows that they still have work to do.”

The progress at UBS could have been faster still. Yet last autumn, the Swiss financial watchdog shocked UBS by demanding that it hold extra capital as a guard against litigation and other operational risks.

The move was a reminder that one of the most difficult tasks facing Mr Ermotti is managing a welter of litigation risks, not least the incipient probe into possible manipulation of the forex market. This investigation is a potentially thorny issue as some of the alleged wrongdoing may have happened since Mr Ermotti took over.

Risk management

Mr Ermotti acknowledges there is work to be done but insists that, realistically, banks can only hope to mitigate such failings.

“Can a bank that is part of this society be sure that it has no bad apples? No. Because like in all other industries and companies it’s about people and what you see is the reflection of the good and bad in society,” he says. “So you employ people that you think are honest but you have to manage them more and more with an eye towards missteps.”

Alongside managing such risks, he says his main focus is to ensure that UBS is the world’s pre-eminent wealth manager. Although the business has continued to attract substantial in­flows, its profitability has been hurt by a slump in client activity in the wake of the financial crisis. Mr Ermotti says he does not expect sentiment to improve until policy makers – particularly in Europe – act to im­prove the geopolitical and economic environment.

For the moment, though, investors appear to be pleased with the progress UBS is making. The bank’s shares are trading at 1.6 times their tangible book value, a measure of a bank’s assets. This is a premium to the sectoral average of 1.3 times.

Mr Ermotti, however, says there is scope for further improvement. “Right now we are, I would say, half way there in the journey of how the stock is seen,” he says. “We are either the most expensive investment bank, or, as I believe, a very cheap wealth manager.”

Copyright The Financial Times Limited 2014