CLIVE STANDISH OF UBS
Interview by Tom Leander

Europe’s second-largest bank by market capitalization, UBS has followed its own path to globalization. With profits of 3.1 bn Swiss francs (US$2.5 bn) on operating income of 12.4 bn for its most recent quarter ended June 30, the bank managed to dodge the earnings shortfalls stemming from market volatility in the first half of the year that afflicted other institutions in its peer group. Clive Standish, the group CFO, chalks this up to a well-defined strategy and a risk management culture tempered in a refiners’ fire of the banks “near-death” experience connected with the collapse of Long Term Capital Management in 1999. During a recent tour of the region, where he served as UBS chairman and CEO, Asia Pacific, between 2000 and 2002, he spoke to CFO Asia editor Tom Leander in Hong Kong about a new offshoring adventure, China risk, and the bank’s durable model.

UBS has intensified its offshoring activities recently. Why?

We’re a bit late into offshoring. We thought about 18 months ago that we should have a closer look. We decided on a mixture of third-party vendors and starting our own captive [shared-services center in Hyderabad]. Why Hyderabad? Offshoring is getting to be a crowded space. In Bangalore and Mumbai we are all chasing after the same gene pool. The reality is that we’re all after the top 10% and the options are getting more limited so we chose Hyderabad as a point of differentiation. We now have 180 seats in Hyderabad. By the end of the year, we should have 500. By the end of 2007, we expect to reach 1,500.

Why were you late into offshoring?

Our business model is a little bit different from those of our competitors. If you are a big retail global bank, you’re going to have a huge amount of IT demand, and huge demands for business processing. Our model is to be a global investment bank, a global wealth and institutional asset manager, but a universal retail bank only in Switzerland.

What BPO services are you investing in?

We’ve set up what we call the global operations center in Hyderabad, which is a unit that monitors the computer systems around the world for the bank. Hitherto, we’ve had 16 individual locations. We now have two – one in Zurich and the other in Hyderabad. Instantly, you save quite a large amount of money and large number of jobs. In addition, we’ve put in some equity and fixed-income research roles [into Hyderabad]. We will do some business processing. The investment bank is looking at what additional activities it should transfer offshore out of places like New York and London.

You’ve come off a very strong quarter. What’s driving profits?

Wealth management has done very well, and our institutional asset management piece has come off a low base and is doing very well. So the driver has actually been net new money, which has been strong for us over the last two to three years. And, dare I say, if you didn’t make money in the first quarter of 2006 as an investment bank, you probably shouldn’t be in the business.

Do you target this part of the world as being the fastest growing in wealth management?

This is the fastest growing part of the world in terms of wealth management. It houses the fastest growing economies in the world and there’s a halo effect emanating from China. We made up our mind years ago that this was a global business, not just a Swiss, European, or North American business. We think scale is important. Even if you’re dealing with high-net-worth individuals, the whole process of creating the right products and services is expensive. Legal matters and compliance become expensive. You need scale to make good economies out of it.

What are the risks to the bank’s growth?

We are lucky to have had a pretty strong bull run. We’re in a different paradigm now. People are worried about inflation. If something is going to slow the global economy down, it’s going to be interest rate-driven. The world has swallowed the current oil prices remarkably easily at US$60 or $70 a barrel. If we go to US$100 per barrel, then a hard landing is likely at the end of the day.

As CFO, how are you involved in the bank’s risk-management strategy?

We had a near-death experience as a result of the [1999 losses at] Long-Term Capital Management hedge fund group. And it happened just after Swiss Bank and UBS merged. It was a shock to the system. In response, we concentrated on risk management and controls extremely diligently, developing a strong risk culture. And we built a track record and have not stubbed our toes, even in the post-tech boom/bust in the early part of this decade. There are people who manage risk and people who control it – they’re separate. We have a risk subcommittee of the executive board. This includes the CEO, the head of risk, each of the business groups’ chairman and/or treasurer, a couple of credit people, and me.

Do you regard China as a high-risk market?

If there’s an element of risk there, it’s that competition will not be fair. It’s a big, interesting, slightly opaque market. It’s not always clear whether there are regulatory restraints or not. The legal system is developing extremely rapidly. You have to have that in the back of your mind. That said, China wants very badly to be part of the world. The 2008 Beijing Olympics works to this end very well.

Are you hedging your bets in China?

Our strategy has been to do what we do today well, and position ourselves for five to ten years from now. The long-term view of the China capital market is very interesting. That’s why we announced our intention to buy 20% of a restructured Beijing Securities in 2005, why we invested in and struck a strategic cooperation agreement with Bank of China, why we bought a 49% stake in a fund management company (Shenzhen-based China Dragon Fund Management), and why we were the first foreign institution to qualify for a Qualified Foreign Institutional Investor license. It’s a diversification strategy. Who knows exactly what’s going to happen? We’re good risk managers.