Chairman and CEO of UBS Investment Bank

John Costas is enjoying life. Not only has his firm, UBS, made

substantial inroads into traditional US territory, it is also showing

enviable profits. He talked to Geraldine Lambe about the firm’s appetite for growth.

There are certain times when investment bankers don’t mind being

interviewed. One of them is when quarterly results show a 78% increase

in profits and tout the best figures in three years. Last month, UBS

posted this enviable set of numbers and John Costas, chairman and CEO

of UBS Investment Bank, is therefore in a very good mood, although he

maintains that his happiness is tempered by the realities of the 90-day

cycle. “It’s great to be able to take those sorts of profits to

investors, but you always know that you start again from zero the next

day,” he says.

Conquering the US

Whether or not Mr Costas is being too self-effacing about UBS’s

fortunes, he must surely be feeling good. He heads one of the only

truly successful European incursions into US investment banking. The US

has been the graveyard of many European ambitions and acquisitions, and

yet UBS has not only made a roaring success of its 2000 Paine Webber

purchase (now the third-largest private client business in the US), but

has also encroached on some of the most jealously guarded American

territory: domestic M&A and advisory, and equities underwriting.

According to analysis house Dealogic, UBS now commands 5.63% market

share of the US equity capital markets compared with 2.98% in 2000, and

has risen from 11th to 7th place in the US M&A league tables

between 2001 and 2003.

Such great strides have been made in the US, says Mr Costas, that it is

now the biggest contributor to the firm’s global investment banking

revenues and, overall, US activities contribute about 30%-40% of group

income.

He says the key to cementing advisory and equity relationships in the

US has been attracting the right talent, and that, he adds ruefully,

means the right American talent. “It’s sad to say, but to gain traction

in the US market, you have to have US expertise.” That said, he

stresses that this has been balanced by retaining the overall diversity

of the business.

As an adjunct to getting the domestic versus overseas balance right,

many commentators attribute European failures, or at least their

lacklustre US performances, to an inability to leave the European

business culture behind. While Mr Costas declines to comment on other

banks’ approaches, he agrees that many European firms have failed to

acclimatise to the US environment as well as UBS, and that often senior

management does not have the confidence to let US talent have the

autonomy it needs to build the business.

“Our group chairman, Marcel Ospel, has shown great leadership here and

it has become part of the genetic make-up of our firm,” he says. “You

have to look at the way he built the company. He has been willing to

bring in O’Connor [a US derivatives firm originally acquired by SBC in

1992] and let people like David Solo [who joined via O’Connor and left

UBS in 1999 as chief risk officer] make their way quickly up the

organisational ladder. He was willing to let them challenge the premise

of the day and had the confidence and ability to leverage that.

“That pattern has been replayed over and over again. I credit my own

success to his willingness to trust and delegate to US people. There is

a very successful marriage between the investment bank and the group,”

he says.

Hiring spree pays off

In 2000, as the bottom fell out of the equity markets and the industry

began brutal cuts in headcount, UBS set out on a US hiring spree to

address the weaknesses of its franchise there. While reducing its

headcount elsewhere, the firm spent $600m-$700m attracting the “right”

US expertise across advisory, execution, leveraged loans, real estate,

distressed securities, structured credit and credit derivatives

businesses.

Mr Costas says that the strategy has clearly paid off. “Our fixed

income platform is now bigger than most of the strongest domestic

players and our equity exposure was given a massive shot in the arm by

the PaineWebber acquisition. Across all product lines, we are now

competing head to head with the five or six firms that dominate US

business.”

Board buy-in

So if staff costs were being cut elsewhere, was it difficult to get

board buy-in for US expansion at the beginning of a bear market? No, he

says. “We have an agreement with the group. We lay out our strategy –

and as long as the reality is not too far behind – we have total

support.”

With US investment banking continuing to gain ground, it is true to say

that Mr Costas has delivered on his promises, but he stresses there has

always been an emphasis on a prudent business blend. “We created enough

of a mix of instantly profitable businesses – such as the principal

finance unit, which did not exist four years ago – with others that

were still growing to ensure a good value base. We weren’t asking

shareholders to take below industry-level returns during our building

phase.”

He says that having the right philosophy has been as important as

having the right people; none of the mergers, changes or growth could

have been executed without what he calls the “philosophical alignment”

of senior management. For example, he spent 70 hours in discussion with

Ken Moelis (head of investment banking in the Americas) before his

appointment in February 2001. “You have to find someone who really

‘gets’ the firm’s approach – who understands our value proposition and

our processes, and who can bring something to that. In Ken, I found

someone I could really work with. That’s pretty unusual between a

banker and an ex-trader.”

A good example of marrying strategy with the right people is the

re-engineering and meteoric rise of UBS’s FX business, which he says

the bank came close to “canning” in 1999 when it was losing money. The

firm invested more than $100m in technology, slashed the number of

traders by 80%, reduced the human-based distribution by 25% and cut

operational costs by about 40%. In doing so, it reduced the marginal

cost of an FX transaction by 90%.

Such a radical change to the business model caused many managing

directors to leave, believing that Mr Costas and other senior

management were making a huge mistake. But turning it into an

electronic business means the bank is now vying for the top spot with

Citibank and has more than doubled its market share to about 11% and

rising, he says. “The guys in charge of executing that strategy were

philosophically aligned with it. If you don’t have that, it’s where

things go wrong.”

UBS also has a particular human resources strategy that Mr Costas says

is crucial to its success. The bank does not do “lateral” hires (ie,

bringing in one firm’s financial institutions group head to be UBS’s

FIG head). “I call that the bribe strategy – you come in only with

money – and that’s not a good way to build a business. I think that’s a

mistake that other business builders have made. We look for a number

two or a co-head, who will do their best work at UBS, who still have a

sense of excitement and who will build something new.”

Opportunities for growth

Because UBS benefits from a greater equity exposure than its European

peers, as well as some of its US competitors, Mr Costas seems

unconcerned about the fixed income slowdown. In fact, he is still quite

excited by the firm’s prospects. “Sure, it was clear that in H1 the

stars were aligned, but right through Q3 it was still a pretty fancy

business in terms of returns and performance. The good news for us is

that we have identified a lot of growth opportunities in interest rate

derivatives, credit derivatives, real estate and other commodity

businesses that will enable us to close the gap as the overall business

moves into more challenging times.

Other things excite Mr Costas: one of them is geographical opportunity,

particularly in China. He says UBS has been in discussions with

potential local partners for about a year. “I will be very surprised if

we don’t announce a significant initiative in China and some expansion

in Asia generally very soon. It is certainly part of the bank’s five to

10-year plan.”

Some bank analysts have compared UBS to Merrill Lynch, saying that

their business models are increasingly converging. Others have posited

UBS as an aspiring Goldman Sachs, citing its growing prowess in M&A and advisory.

Mr Costas laughs. “It would be too bold to say that we are the best of

all of them, but in many ways we cover a lot of our competitors’ sweet

spots. In the end, though, we are different. We have overcome the

European niche class to become a viable competitor to US bulge bracket

firms, but have not done so at the expense of a very globally diverse

institution that gives us the ability to grow fluidly anywhere in the

world.”

Career history:

Graduated from the University of Delaware in 1979 with a BA in

political science, and completed his MBA in finance from the Tuck

School of Business in Dartmouth in 1981. He is a member of UBS’s group

managing board and serves on several external boards.

2002: Appointed chairman of UBS Investment Bank

2001: CEO of UBS Investment Bank

1999: became global head of fixed income and treasury products before his promotion to chief operating officer

1998: after Union Bank of Switzerland and Swiss Banking Corporation

merger, appointed managing director, global head of fixed income and

banking products then global head of interest rates

1997: promoted to global head of fixed income

1996: appointed senior managing director, head of US fixed income and derivatives at Union Bank of Switzerland

1981: joins Credit Suisse First Boston as MBA graduate trainee, roles

included a position in interest rate sales. Left the firm as managing

director, co-head of global fixed income

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