Welcome back everyone. Wow, what a day has it already been? I hope this afternoon provided you with some valuable insights. Earlier today, we heard from Philip how he manages Nestle. Now, we turn our focus to another Swiss company, the UBS. As a Swiss, I have followed its developments quite closely. But it's not just a Swiss story. It's a global one. And I'm sure many of you have as well. So, the next session will not just be about banking. It's about how to be and navigate in a global market. So, rather than me talking about the story, let me now introduce two people who are right at the center of it. Axel Threlfall, editor at large at Reuters, together with Satyajit Malati. Please welcome them.
All right, very good. Welcome everyone to this final session of the day. Fabiola, thank you very much indeed. We've got 30 minutes. We've got lots to talk about. So, I do want to jump straight in. The state of the global markets, I think, is the quite broad title of this session. So, I'm going to kick it off with that. You have expressed concern about what you called excessive optimism in the markets. S&P at record highs, M&A market booming. How do you explain, Sergio, how do you justify that exuberance? How sanguine the markets are being right now?
Well, I guess the easiest way to explain it could be potentially the excess liquidity in the system, but there is also potentially an explanation that goes beyond that. The huge ongoing transformation of the economy through technology, through AI, through developments is creating a powerful force of investments. You look at the energy sector, data centers, AI, and the potential deployment of this technology in the rest of the economy. And that creates a potential positive effect and may justify this kind of valuations. And now it's quite clear to me that pockets of the technology sector will never be able to deliver that kind of expected economic returns. So, there is a big difference between calling a technology bubble and a financial bubble. The technology is here to stay and eventually be quite disruptive.
We will come on to technology and AI in a little bit, but back to this exuberance and this excessive optimism, again, that you have warned about. Where's the tipping point, do you think, potentially? We haven't seen a chain reaction yet, but what could that be?
I don't know. I think honestly, and I don't think anybody can really pretend to know. That's the reason why right now you need to really focus on diversification. And because it's very difficult to reconcile these macro effects, the geopolitical events that we have been seeing in the last 10 years developing. And actually, none of them has been truly resolved. And yet a new one is coming. And the accumulation of all these issues, one day or the other, is going to create some things that is not necessarily catastrophic, but clearly not very constructive for the economy. The last one is going to be quite this one in the Middle East, which is going to take time to digest. No matter how quickly now a peaceful solution can be found, the inflationary aspect of what happened on top of what we had before is going to take time to digest.
Of course, on the one hand you are warning you're cautious. On the other hand, the bank is doing extremely well playing the volatility in these markets. And I guess there's a little bit of an irony there. Would you personally want to be fully invested in the markets at these levels?
You want to be invested in a diversified way. I don't think it's time to have high conviction about anything. It's very important to have, from an asset class standpoint, a huge diversification, but also from a geographic standpoint, diversification. But look, the truth of the matter is that it's fair to say that at least for 3 months this year, cash was king. The best investment you could have was cash, and then the people that took the opportunity to step in the market, they did a pretty good return. But diversification is...
And we talk about diversification, and of course we've talked a lot over the 6 months to a year now about diversifying away from the US. Is that a foolish move to make?
Well, diversification, first of all, I don't think that there are in the foreseeable future any alternatives to the dollar and to the fact that the US markets are the largest and the most liquid and, by the way, the one that brings the highest degree of innovation. So, I think that's important, and also when you want to truly diversify, and here I'm talking about the vast majority of the assets, where should you go? There is no other liquid place to go. Europe has no common market, with one currency, the euro, but no real common equity markets and depth of markets to accommodate all the outflows. And China has the potential to become an alternative but not to the same degree for political and geopolitical considerations. So, I would say that while one can be very critical about certain aspects of what's going on in the US, the US for the foreseeable future is an unavoidable reality.
Sergio, is it better to be, is it more important to be patient, thoughtful, and take a measured approach as a leader of a financial institution in such an uncertain context? Or is being quick off the bat, agile, ready to take a risk, or a calculated risk, the way to go? What's the most important thing for you right now?
You have to do both. The strategy has to be well thought through and something that you deliver regardless of the short-term conditions. What you need to be fast at is how to respond, how to react to short-term movements. But strategically, you cannot run a large institution in a quick way in the way you just described. So, you need to know what you stand for as a business. You need to know where you want to invest, make your long-term investments. And what you can do is scale up or scale down investments depending on the cycle. But you can't run a bank or a large institution on a stop-and-go basis.
The capital standards issue is something that obviously has been front and center. I'd like to talk a little bit about that. I know this decision has been pushed now, I think, to the end of the year, to August or some such. But how detrimental do you feel this is to UBS now?
It's distracting. But we were lucky that all our people in the organization still stayed very focused on serving clients in the last 3 years while going through the largest integration in the banking industry. And by doing that, we created the credentials and the credibility to be able to now invest for the future while having to wait to understand exactly how these capital reforms or proposals will impact our ability to compete. Because at the end of the day, while we have certainly a lot of uniqueness in Switzerland, we are competing globally. And we are competing not only for clients. We are also competing for capital.
Two questions on the back of that. I guess, and you've been asked this before and I've been trying to work out a way to ask it slightly differently, but if things are as intolerable as you have suggested they might be, how far is UBS prepared to go? I mean, is UBS prepared to leave Switzerland?
The proposals as they are, they are excessive and not aligned with international standards. What we are asking is to have a framework that allows us to be competitive operating out of Switzerland. And we are basically asking to adapt and get the lessons learned from the Credit Suisse crisis. And most importantly, fully disclose and understand the root causes of what happened with Credit Suisse. Credit Suisse wound down because the business model was not the right one. And of course, management boards, shareholders have their own responsibilities. But without excessive concessions that were done to Credit Suisse in terms of not implementing the regulation as UBS did, it created a capital issue. Now, trying to forget this aspect from the debate or leaving it out from the public debate is not really addressing the root causes of what happened. So, from our standpoint, I can tell you that we will do everything till the last minute to make sure that we can contribute in a democratic process to make sure that Switzerland will continue to benefit from UBS and UBS will continue to benefit from Switzerland.
Can you see a scenario there, Sergio, in which UBS leaves Switzerland?
I'm focused on one option, making UBS strong out of Switzerland. And I'm not engaging in any discussions about any other hypothetical options.
When are you going to tell investors? When are you going to tell the market what it is you're planning to do?
Well, first of all, let me tell you that it may be even the market that tells us what they want us to do. So, the issue is very much the one that we have a fiduciary duty to prepare for any scenario. But as I mentioned, we are not getting further distracted by any other topic other than making sure that whoever now makes the decisions makes decisions based on facts and concrete data points instead of broader fears or theories.
With the benefit of hindsight, would you have done anything differently in this tug-of-war?
We don't have a tug-of-war. We are on... It's not a tug-of-war, because look, we are not part of... we are now starting to be part of the process. And in the democratic process, we are a receiver of this. So, this is in the end of the authorities and in the end of parliament. We are not in a negotiation. So, people are talking all the time about compromises, but you do a compromise when you are in a negotiation. We are not in a negotiation. We are on the receiving end of something. So, we need to adapt and we need to accept what's coming out. And we can only hope that at the end of the day, these decisions are, as I mentioned, based on facts.
Yeah, I mean, you mentioned distraction quite often. I imagine you're pretty frustrated by the distraction. I imagine you wish you could spend your time on other things than this. For example, the complex geopolitical context, the technology and the AI future. Am I right?
That's better than facing the geopolitical issues, I would say, of course, but it's part of the job. When you run a job like this one, you don't get to pick to do whatever you want. So, you need to do what is necessary, and it is part of the package that you need to address this kind of issue. So, I'm not frustrated about the debate. It was a legitimate need for the public. And I would say for the parliament to fully understand what happened. You don't get into that kind of very sad situation, what happened with Credit Suisse, and nobody can be pleased. And of course, people need to understand and address the root causes of the issue. So, I'm not frustrated about the public debate.
Can European banks keep up with Wall Street banks?
I think so. Although, of course, banks are growing as a function of the economy growing. Banks are growing as a function of having large markets and creating economies of scale. And it's fair to say that Europe is still very fragmented. So, it's not able to deliver the same kind of profitability US banks are able to produce out of their own countries. By the way, which also enjoys the peculiarity of having a high degree of financing being done through capital markets. So, banks in the US are benefiting both from contributing to the economy through their lending and banking activities, but also by doing a lot of intermediation between capital markets and the clients. So, in Europe, we don't have a capital market. We have a fragmented unit. So, in order to succeed, and we can succeed, UBS is a leader globally in asset gathering, in wealth management. We are a leader in certain aspects of the investment bank. But you need to pick where you want to compete. You need to pick areas where you have uniqueness and you can really compete with the others.
What will it take to close that profitability gap though? And do you think UBS will manage to do it, and in what timeframe?
We need to invest in excellence. First of all, we don't have a profitability gap across the board. A few US banks, not all of them, are more profitable than some European banks, right? But others are not. So let's not put everything in the same basket. We have to really understand that we can compete with US banks, but only if we are focused on what we do. And what it takes is to invest in technology, invest in people, investing in new markets.
How about weaving yourself more tightly into the US market? With an acquisition, for example?
We already manage 2.5 trillion dollars of assets in the US. We make 2 billion a year in profits for the last 10 years. Of course, we want to grow the share of wallet of what we do with our US clients. We are already operating out of 300 cities in the US. So, we are quite established. Now, we need to develop a broader business, but it's not necessarily true that we need to do it through an acquisition. We may have to do an acquisition. We may want to do an acquisition. I don't know about any big organization that can rule out acquisitions. Acquisitions, you need to fix whatever you can fix first on your own and get to the level of efficiency on a stand-alone basis before you go into the acquisition. Acquisitions should not be there just to fix issues.
But again, I wonder what will dictate that for you.
Can we add value to our clients? Can we add value to our shareholders? Very simple. I don't see any other metrics. And if the answer is yes, then it happens.
