I thought banking was boring and then all of a sudden I find myself in saying that in that place they were talking about everything that was going on in the world and everything that was going on in the world was reflecting in stocks or currencies movements and so I said this is pretty fun, right? This is really interesting. You are at the center of everything that goes on and I think in banking today is still the case.
Welcome to Leaders Unplugged. Leaders Unplugged is real talk with the impactful, candid, honest, actionable, and always fresh from behind the scenes, presented by IMD, and hosted by IMD's president, David Beck. I'm Felix Zapner, journalist and founder of Remote Daily, and have the huge honor to co-host this brand new format together with David. And today for our second episode, we welcome our first guest. David sat down with no other than Sergio Ermotti, the CEO of UBS and one of the most influential leaders in global finance. In front of a live audience at IMD's home in Lausanne, Switzerland, they talk about everything from the recent takeover of Credit Suisse by UBS, cryptocurrencies, to how Sergio went from being an aspiring soccer player to banker. And right in the beginning, David brought up the question whether UBS is too big for Switzerland and whether Sergio understands even though he disagrees why in the public conversation this question just hasn't gone away.
I fully understand, you know, as I mentioned before, it's traumatic and tragic what happened. So people are asking themselves, wait a second, we have been told few years ago that the new regime and the new regulation would avoid some things like that happening and now here we are again. Well, of course all of a sudden we have to go through an emergency law over a weekend to rescue a bank. Of course, I understand why people are asking the question, but yeah, that's the reason we have to be serious about how we answer the question and not allow a culture of fear to dominate this debate. Now, if I go down to the classical example, we are too big for the country because the size of our balance sheet is twice the size of the economy. Then I have to say, okay, let's go through the numbers. I fully understand we are, but Switzerland is a country that punches well above its weight in terms of many dimensions. If I look at the size of the Swiss National Bank balance sheet compared to the GDP, if I look at the debt per capita in Switzerland, you know, many of you I'm sure know is one of the highest in the world. The debt per capita in Switzerland. Okay. Lots of mortgage owners in the room. Exactly. So when you look at the size of our balance sheet, you have to say okay let's put all these data points, you know, the fact that we per capita have twice as much wealth as any countries around us or the size of the market cap of the stock exchange in Switzerland is the sum of, I would say, Italy, Germany, Spain and Austria together. It's more than Germany, right? So that's what I'm always trying to say is okay, by the way, Switzerland is the 20th largest economy in the world and we are number 19 as a bank in terms of size in the world. So I'm saying okay this is what Switzerland is all about. Now let's talk about the risk. We have 1.5 trillion of balance sheet. So if you look at the difference between our current balance sheet and what you know, for example, the financial crisis back then UBS and Credit Suisse combined at 3.7 trillion of balance sheet versus 1.5 today. 2007 back then 75% of the balance sheet was in the investment bank, today it is 28%. 60% of our business is coming from wealth management and asset management, 20% from the Swiss bank, so personal banking and commercial banking, and 20% is the investment banking. So 350 billions of the balance sheet are mortgages and credit to Swiss companies. 250 billions is liquidity held at central banks. So if you go through the balance sheet, then you understand why we cannot simply look at the balance sheet of UBS to automatically look at the risk. So fine, I do understand all these risks and we need to educate people about this issue and not create fears. Actually, what we would have seen if UBS would have not been part of the solution for whatever reason, today you would probably see a Credit Suisse that would be almost like a cantonal bank with some international wealth management businesses attached, right? And this is not my opinion. Every single expert that went through the FSB, the banking expert and everything has been quite clear. But of course, we would have lost many more jobs in Switzerland. We would have had a huge reputational damage to the country because nobody would have understood why are you going through a liquidation in such a way that can create some collateral damages if you have a solution with UBS. That was what happened. So yes, I understand in conclusion why people put it that way. But you know, unfortunately, the public debate is not very balanced in really understanding certain elements of what happened and how in the unlikely event that UBS goes through a similar issue, we are pretty convinced that the bank is resolvable and without the taxpayer having to risk any substantial... Actually, I'm convinced taxpayers usually make money out of this exercise. Not that they should make money out of it. This is not a business model of course, right? But of course the proof of what I'm saying is that in Switzerland the last two occasions, you know, the taxpayer made money out of it, which is the proof that the regulatory regime must be good enough. By the way, must be good enough if UBS was able to bail one of the most significant systemic banks in the world within months, we stabilized it. It must be that something is going right somewhere.
I really appreciate how you put this to remind folks that there was an alternative to UBS taking over Credit Suisse, but that in many ways that alternative would have been less beneficial on a number of dimensions: confidence in the financial center, employment, support for customers and so on. So I'm going to formulate something now. You don't need to agree with it. But in many ways you can look at this and I think some people outside of Switzerland looked at this. It was pretty extraordinary what your colleagues have done. I mean, you can say a massive favor. Again, this is not a word that you would probably use and yet your team then has been sort of on the receiving end of some of what you described right now. Is that a challenge when you know people have been working incredibly hard to stabilize this other bank, to integrate it? Right. This is not something that anybody had on their plan for the year, but you're not exactly being showered with gratitude. It seems like and people are scrutinizing everything that you're doing. Is that fair? Well, you don't have to say if it's fair, but I'll just put it like that. It's pretty fair. It's fair. No, it's pretty fair.
One thing I can tell you for sure is that of course you have to have a fiduciary duty on making the right thing for your shareholders, your stakeholders, but also a sense of responsibility to step in and help the country. And in a sense, I can assure you that having worked for nine years with my team and the rest of the people in the bank to restore confidence in UBS and the Swiss financial center, I was very proud to say that UBS was asked to be part of the solution over the weekend. So that for me was closing a chapter of what Switzerland did for UBS during the financial crisis. So in that sense, it was the right thing to do because the contagion effect... It's fair to say that in a very opportunistic way, the best thing to do for UBS would have been to stay out and just get a lot of business within a few months without doing anything. But of course we would suffer if Switzerland suffers because we are intertwined, one and the other goes together. So it was absolutely essential. Now I have to say that we don't need to be thanked. We don't want to be thanked. We don't want to be loved. We want to be respected. And in that sense, of course, if you look at the debate, you may think that we created a problem. Of course that's a fair statement. Of course I agree because that's the situation we have to now face. And the issue is that why I go back to the point: why was Credit Suisse allowed to go on for so long in such a precarious condition without any intervention? That's the question. The markets flagged it already in 2019 and 2020. Just forget about the stock price, the funding level, the profitability, the reputational issues. Things were going on for years and then all of a sudden you think that over 72 hours you resolve everything.
So we have a number of questions on technology and innovation. You talked about this. Has the integration of Credit Suisse distracted UBS from the pursuit of innovation with technology? Can you speak a little bit about that space and again, has the integration with Credit Suisse helped? Has it hurt? Has it been neutral in your pursuit of innovation and wealth management in particular?
Oh, of course it's distracting and it's impossible to say that it's not affecting us. I mean, the profitability of the bank is as of today still well below what UBS standalone had in 2022. Why I talk about that is because lack of profitability means also in some cases lack of resources to invest in your business in the future. So although we are comfortable that we are building up the right profitability to do everything, it's impossible not to think that we cannot overspend as we go through all of this. And there is also a capacity issue. So it's not only for myself but the entire management and the organization cannot embark on too many projects for growth or innovation without considering the operational risk that we have to successfully deliver the integration. So yes, there is a distraction. Now, is that something that I'm concerned about? No, because we know and actually we are already discussing and implementing new technology. I mean, of course artificial intelligence and digital capabilities are at the top of our agenda. So despite everything that goes on, we have rolled out or we are rolling out as we speak the largest deployment of Copilot in the financial services industry with 50,000 licenses. We have a couple of capabilities that we have been developing and we are funding in terms of giving our people the best tools to be successful. But having said that, of course we cannot change the processes of the bank in the middle of the exercise that we go through because that would create too many risks. So by the way, we don't need to be the front runner in innovation. We need to be a fast adopter. And if we are a fast adopter alongside with our franchise and capabilities, we can continue to be competitive.
What might be the impact of AI on wealth management? Clearly there are some fairly tangible applications around productivity and so on. But what might be some of the more discontinuous changes that the widespread adoption of these technologies might bring to your industry?
Look, I still believe, and when I look at talking to not only in banking but also in even best-in-class users of AI, the truth of the matter is that 80% of the value creation will come from having a more efficient front-to-back capabilities, eliminating unnecessary steps, controls, and things that humans over time when they are solicited to do the same job for too long with even more data, they become less efficient. So we're going to see a lot of this. We're going to see probably more the middle office function changing in the way they support client-facing activities. So in a nutshell, I would say 80% is going to be efficiency, even 20% topline I would say in the next three to five years. So of course at the end of the day, you will see probably the ability to serve a larger number of clients, a broader set of clients by enhancing productivity and effectiveness on how you do things. Now the real issue is going to be to see how the agent AI topic will develop versus the current gen AI, which is probably more the one that is of immediate need for us. But it is absolutely clear that if you don't embrace these changes, in 10 years time you won't be able to compete.
You have a number of questions on tariffs and you mentioned at the very beginning that you weren't as concerned about the sort of first order impact on UBS but you were quite concerned about the second order, the global economy growth, your clients. Give us a bit of your sense of the global economic outlook. How do you look at the risk of now reciprocal tariffs which of course have already come in and the risk of a prolonged trade war as opposed to this being about negotiation and bargaining and ultimately is going to be short-lived if inflationary pressures lead to U-turns? What's your sense?
No, look, you know, I have to go back before even the recent developments and I have to say we are coming out of decades or a very long period of de facto benign economic conditions. I think that if you take out the financial crisis and also COVID, which were kind of V-shaped crises in which we got used to some kind of disruption but also a quick recovery, we haven't seen for a while a classical recession. And if I look at the state of the productivity and different economies in the world, changes that we see coming from China which is still growing but much less than before, Europe we all know the state of the economic situation in Europe, I would have to say that without a catalyst, a major catalyst, it would be difficult to restore quality of growth. Now the catalyst could be innovation and technology. How do you enhance productivity? How do you face the issue of lack of demographic support? In America, I was hoping that this could be a catalyst for change. Although I'm firmly of the opinion that humans need to go through crisis in order to really change, and so without a true crisis you don't change. Now the recent developments in my point of view are clearly putting a lot of risk to the positive effect. The speed of change may be overestimated but the scope of change is underestimated. In 10 years time, the effect of AI and technology will be so massive that I can be positive about.
But short term, all these tariffs, all these geopolitical issues, all these very parochial views of the world are going to create tensions, and economic tensions in a fragile geopolitical environment are a very dangerous cocktail.
So let's make the optimistic case for Europe. What is your outlook on the European economy and are Europe's leaders focused on the right issues to reignite the kind of growth that we need? Are we working on the right issues?
We are talking about the right issues. I'm not so sure they are working on it. Well, let's see. Maybe it is the shock that the US administration is bringing to the table, maybe a wake-up call. I have to say that I was very disappointed that Europe didn't use as a catalyst for thinking about its future Brexit, because Brexit was in fact a wake-up call. Right? So just something that was indicative of a potential ramification going into the rest of Europe. And by now you know that in different countries in Europe, I don't know how a vote pro or against Europe would go. So in a sense, now with the new developments, one could hope that just purely from the current debate around defense may be the triggering point for Europe to understand that it's not enough to be a superpower on paper. It's not enough to have one currency to pretend that you are one economic power. If you don't have a clear defense, a unified defense in this very geopolitical challenging world, if you don't have a clear one voice on foreign policy, it's almost impossible to be a relevant player. It's actually allowing things over time to go down to the lowest common denominator. And so, yeah, I'm afraid that it's only a crisis that can drive changes. Honestly, I think that Europe should take examples from Switzerland and the US and to some extent the German system to have a more federal approach to its policy.
