UBS Group AG sees bank profits under pressure as European regulations force lenders to charge for research, breaking apart a decades-old business model that’s prompted a race to provide the cheapest offering.
“It will be challenging and it will be rocky” Andrea Orcel, head of UBS’s investment bank, said of the impact of the MiFID II directive in a Bloomberg Television interview. “Everybody has run scenarios but I don’t think anybody, either an investment bank or a client, will tell you they have it figured out.”
The revised Markets in Financial Instruments Directive is causing tumult as banks and money managers struggle to price research previously bundled with other services. The EU’s plan is to ensure more investors act in the best interests of their clients and aren’t induced by free analysis. While banks try to figure out what the market can bear, money managers—unused to paying—are now weighing what research they really need.
In a wide-ranging interview, Orcel spoke about the previous five years overhauling UBS’s investment bank, the challenges posed by Brexit, finding profitable growth, banker compensation and how some clients don’t understand the Zurich-based bank’s pivot to wealth management.
Orcel likened the bank’s model for pricing its research to that of a phone company that makes most of its money from the more expensive data and other services on top of clients’ basic bill. Similarly, he said, UBS plans to build its pricing around a basic research package which would probably cost “thousands or tens of thousands” of dollars and then charge extra for value-added services such as access to the bank’s analysts.
There’s wild variations in the market so far. JPMorgan Chase & Co. is proposing to charge $10,000 a year for read-only access to research on stocks, undercutting the $39,000 Barclays Plc has proposed for a similar package and UBS itself about $40,000, according to people with knowledge of the matter. At the top end, Barclays has also quoted $450,000 for firm-wide access to its premium offer for equities.
Orcel’s overhaul since 2012 has ensured more regular profitability at the bank and may allow the world’s largest wealth manager to better offset threats such as MiFID. UBS has pared back the business to focus on more stable wealth management revenues, leaving Orcel running a slimmer unit based around deal advisory, equities and research. Last year it contributed just over a quarter of net revenues and 16 percent to UBS’s pre-tax profit. With much of the restructuring at the business now out of the way, Orcel said he and colleagues are resisting the urge to cut prices to win market share because ultimately that won’t contribute to the bank’s bottom line and undo cost savings achieved so far.
Orcel also touched upon China and banker compensation, arguing the latter is becoming “frothier” again in the US for talent.