UBS' Bureaucracy Outweighs «Khan Effect»

UBS says its key Global Wealth Management division has gained momentum, and many commentators put this down to the so-called Khan Effect, but a closer look at the numbers tells a different story.

Global Wealth Management is UBS’ core business and was the driving force in the second quarter by contributing an operating profit of $1.29 billion, around half of the bank’s total operating profit.

Inflows of new money, high customer activity, more fee-generated assets and higher transaction revenues meant one thing, «momentum», according to CEO Ralph Hamers. Commentators were quick to draw conclusions and put the sharp rise in earnings down to the so-called «Khan Effect».

Since Iqbal Khan joined UBS as co-head of Wealth Management in autumn 2019, any perceived improvements have been automatically attributed to success-story Khan, who apparently had already worked similar miracles at Credit Suisse.

Reality Different

However, factors other than the presumed Khan Effect should be taken into account.

The Global Wealth Management division’s performance in the second quarter of 2020 was very weak with a profit of $880 million as clients were distracted by the corona pandemic. This base effect should be seen in the contect of the 47 percent year-on-year rise in profits.

This does not reflect on Khan's performance. The 45-year-old has managed to thrive in the shark tank of powerful managing directors and customer advisors and, in particular, significantly shortened the processes between a client order and its execution.

But nothing if this can be seen in the results. In the first quarter of 2018, when UBS had just merged its two wealth management units and, in addition to Tom Naratil, Martin Blessing was co-ceo, UBS was just as, if not more efficient.

This comparison speaks for itself. In reality, UBS is only in a better position in terms of assets under management – they have risen by more than 30 percent within just over three years.

Assets Growing Faster Than Revenues

Neither revenues nor profits have kept up with inflows. Compared with the first quarter of 2018, these two key figures have grown by only 13 percent.

UBS has also made no progress on its cost-income ratio, which remains at around 73.1 percent.

Khan's oft talked about "love" of lending to rich customers should also be put into perspective. The loan book to customers in 2018 was around 172 billion francs ($187 billion), now it is $228 billion. Again, no extraordinary growth is discernible in relation to the assets under management.

No Economies of Scale

One of the conclusions from the comparison is that UBS has not succeeded in scaling up in Global Wealth Management. It cannot convert significant increase in customer funds, which has been mainly due to market movements into higher profits.

UBS is also wrestling with the age-old problem of passive clients who deposit their assets with the Swiss bank primarily for security. Secondly, big bank has not been creating profit and revenue growth without costs rising by a good 12 percent between the periods compared.

More Efficient Customer Advisors

In this context, it is striking that UBS achieved a very good result of the first quarter of 2018 with 10,654 client advisors. In the second quarter of 2021, there were significantly fewer. 9,480.

UBS client advisors have therefore become more efficient, which can be put down to the Khan Effect. However, the inertia caused by UBS’ bureaucracy and processes has more than offset this.