Soon after Iqbal Khan joined Credit Suisse in 2013 he was invited to dinner at Zurich’s elegant Ristorante Bindella for a discreet conversation with the chief financial officer of UBS, his new employer’s fierce rival.
Khan had got to know Tom Naratil well over the previous two years while Khan was a partner at EY and lead auditor to Switzerland’s UBS. Over a chandelier-lit pasta meal, Naratil decided UBS would benefit from bringing the highly ambitious Khan onboard.
Now, two years after the ex-auditor finally joined his one-time client, Khan and Naratil are running UBS’s $3.6tn wealth business, the bank’s beating heart and its profits engine. “The fact that they didn’t end up in a situation where either got fired or they killed each other, that’s actually a pretty good relationship,” said a senior UBS executive.
But with profits hitting record levels, the pair must now prove they can keep returns high while also managing the growing risks.
As the world’s biggest wealth manager, UBS has had a stellar pandemic. Its ultra-wealthy clients have seen their assets soar on the back of the trillions central banks pumped into the global economy. Much of that injection has ended up in the financial markets, helping the total wealth of billionaires worldwide rise from $5tn to $13tn in the first 12 months of the pandemic.
UBS’s Global Wealth Management business reported $1.3bn of quarterly pre-tax profits in July, accounting for half the wider group’s total profits. That represented a 47 per cent increase on a year earlier and its best second quarter ever, with record profits in Asia.
But UBS’s resurgence in wealth management has as much to do with a new strategy code-named Elevate, which was introduced by Naratil and Khan 18 months ago, as it does with macroeconomic events.
The plan was to restructure the ailing wealth business to make it more efficient and sell higher-margin products and services to UBS’s richest clients, taking advantage of the bank’s considerable heft.
“I don’t think it was rocket science what we did,” said Khan in an interview with the FT. “It was all about how do you elevate the business based on the great foundation it already has.”
But the emphasis on rich clients borrowing more, trading more and taking on more sophisticated products has raised concerns that UBS is taking on riskier business for the sake of bigger profits.
It was a strategy Khan pursued with vigour as head of the wealth business at Credit Suisse until his dramatic departure two years ago after falling out with the group’s then chief executive Tidjane Thiam.
Since the launch of Elevate in January 2020, invested assets in UBS’s wealth arm have ballooned by $595bn, more than the total assets under management of Switzerland’s third-largest bank, Julius Baer, which Khan was close to joining as chief executive before switching to UBS.
Meanwhile, UBS has lent an additional $49bn to its clients over the past 18 months, with more specialised, higher-margin lending becoming a small but growing part of the business.
“In the current environment, this strategy is working and working well,” said a senior executive at a rival Swiss bank. “But are they able to manage risk and reduce leverage if volatility picks up and there is a strong correction in the market?
“This is the proof we don’t yet have and will tell us whether they are doing a good job or not.”
The series of scandals engulfing Credit Suisse since Khan’s departure — including the $5.5bn loss on the collapse of family office Archegos Capital and liquidation of $10bn of funds linked to specialist finance firm Greensill Capital — point to the dangers of neglecting risk controls in the pursuit of profitable clients.
UBS has had its own share of issues. It was hit by $861m of losses from Archegos, having offered prime brokerage services to the business run by former hedge fund manager Bill Hwang. And the decision of a French court on September 27 over whether the bank should pay up to €4.5bn in penalties for helping rich clients evade paying tax also looms.
While Elevate has produced strong results for UBS so far, critics are sceptical about whether it can keep going. “Elevate has been about grabbing low-hanging fruit up till now,” said a former UBS executive. “The big question is, what’s next?”
The plan to increase lending predated Khan’s arrival. But one of the first things he did when he joined was convince the group’s executive board to extend more credit to UBS’s richest clients and give them more flexibility in trading.
“Some people will say you guys are pushing lending now,” said Naratil. “We don’t push lending — our clients borrow. They just don’t borrow as much from us as we would like.”
Last year Khan poached one of his senior lieutenants at Credit Suisse, Remi Mennesson, to lead a new global financing team at UBS, which straddled the wealth management business and investment bank.
The UBS team was set up to offer a faster service to its richest clients, but also to explore more sophisticated lending. Rather than traditional forms of credit, such as mortgages and Lombard lending — which use the borrower’s listed securities as collateral — the so-called structured loans that Mennesson’s unit specialises in use illiquid assets, such as stakes in private companies, as collateral.
Though such loans can command higher interest rates for the bank — up to double earned from Lombard lending — they are also riskier.
The majority of UBS’s lending to rich clients has taken place in the US, where Naratil said UBS is finding more demand for specialised lending.
“More and more wealth is created from entrepreneurs in the new economy and companies staying private for longer,” he added.
Khan had focused Credit Suisse’s lending strategy on extending credit to the bank’s wealthy Asian clients. Among the recipients was Lu Zhengyao, chair of Chinese Starbucks rival Luckin Coffee.
Thiam once feted Zhengyao as a “dream client” and “absolutely the poster child for what we want to do”. Credit Suisse had sponsored Luckin’s IPO in May 2019 but when Luckin Coffee’s shares plunged 82 per cent last April following allegations of a $310m fraud, Zhengyao’s family company defaulted on a $518m margin loan. Credit Suisse was one of a handful of banks that provided the syndicated loan.
UBS has offered relatively few structured loans so far, accounting for less than 5 per cent of the $49bn of gross loans provided this year. By contrast, around a quarter of Credit Suisse’s wealth loan book is in structured lending.
However, in another ill-fated deal, both UBS and Credit Suisse, along with JPMorgan, jointly offered WeWork co-founder Adam Neumann a $500m personal loan that used his WeWork stake as collateral before the group’s failed IPO in 2019.
Since Ralph Hamers replaced Sergio Ermotti as UBS chief executive 10 months ago, he has presided over a period of strong growth, though analysts and shareholders have been underwhelmed by his lack of grand strategy.
Khan and Naratil, however, back Hamers, saying their business has benefited from his focus on putting clients’ needs first and improving efficiency through digitisation.
But at one stage all three were fighting for the top job. And the success of Elevate will stand Khan and Naratil in good stead when the position next becomes open — but if the risks prove unmanageable then the pair could also fall.