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