Why UBS won't make redundancies in its investment bank - yet

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In case there were any residual doubt about the harshness of the first quarter, Sergio Ermotti, CEO at UBS has cleared it up. In a presentation today at Morgan Stanley's European Financials Conference, Ermotti said conditions for UBS's investment bank in the first quarter were 'among the toughest in years, especially outside of the U.S..' 

The implication is that now is not the time to be working for UBS in, say - London. Staff at Broadgate Circle already had some reason for apprehension - headcount in the UK has been rising. At the end of 2016, UBS only had 5,206 people in the City. By the end of last year, this had risen to 5,782.

The corporate centre aside, staff at UBS will be spared the axe - for the moment. Ermotti said today that the miserable first quarter will be manageable just so long as it's not repeated. UBS will only generate a return on equity in the middle single digits for Q1, said Ermotti, adding that this is an, "acceptable outcome," if it's a "one off."

UBS will however, be cutting costs. Ermotti said today that the bank intends to extract in additional in CHF300m from cost savings across the bank as a result of the miserable first quarter. Instead of trimming headcount, however, Ermotti said the bank will do this by 'pacing' its technology investments, by slowing down its hiring, by 'pacing' re-hiring (implying that empty jobs will go unfilled), by reducing its spending on contractors and consultants, and by cutting spending on travel and entertainment.

And if the first quarter wasn't a one-off? Then there may be cuts to come at UBS's investment bank. For the moment, though, Ermotti said the bank continues to focus on expanding its advisory and execution business, on growing in APAC and the Americas, on digital innovation (irrespective of the less pacy tech investments) and on producing 'differentiated content.' 

Ermotti's presentation also included the following interesting graph. It suggests that UBS's overall business is more cost-intensive than rivals', but that it makes more efficient use of capital in the generation of revenues to help offset this. Ermotti noted that the investment bank now has, '30% more capital than just a few months ago' and that its return on equity has fallen by a third because of this. As 2019 progresses, UBS's traders need to hope they can keep generate the revenues to justify the bank's investment in them.

Revenues vs. capital and cost efficiency:

Source: UBS

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