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Weary of negative rates, UBS looks east

UBS chief executive Sergio Ermotti (Photo by Keizo Okubo)

ZURICH -- In its 154-year history, Swiss financial giant UBS has had its ups and down. Surviving the 2008 financial crisis was certainly one of the low points, when it had to rely on assistance from the Swiss government and the Swiss National Bank. There have been scandals too, the rigging of Libor and foreign exchange benchmarks to name just two. But those days are now in the past, according to the company's chief executive. In an interview with The Nikkei, Sergio Ermotti talked of the future, and his willingness to expand in Japan and China.

"We see Japan as a very important place, particularly in light of the low rate environment, and because of demography," Ermotti said. UBS will celebrate its 50th anniversary in Japan on September 15th, but he feels they can acquire a much larger presence. "Investors, individuals and corporations will need to diversify their investments and look for growth. Some of these investment opportunities will be abroad as domestic yields are low and the stock market has not been very rewarding."

He is aware of the competition from local financial institutions, but believes there are chances for collaboration as well. "We could help those institutions, the ones that want to build up wealth management capabilities, to speed up this process in an efficient manner." He showed his confidence in the expertise UBS has in wealth management. "We could have also those institutions that put wealth management at the center of activities and don't offer the same level of diversification and sophistication when it comes to managing assets."

Yet, Ermotti indicated he is in no rush to expand, "it takes time to get familiar with the benefits wealth management can offer and for investors and clients to realize their needs." He also said that increasing the sales force is not the way. "We try to avoid the concept of sales. We see ourselves as advisers. We are not trying to just go out and sell products."

UBS is also willing to take long term perspective in China. "First of all, we need to attract customers and we [have] only [just] started with our onshore presence in China. So we need to build up our presence and brand there and this will take time." As in Japan, he feels alliances can bring opportunities. 

(Photo by Keizo Okubo)

He explained that UBS has a strategic partnership with Postal Savings Bank of China, having been involved in its IPO process and privatization. "We see ourselves as a bank not only facing directly to clients, but in many cases helping develop the industry overall."

He noted that "the dynamics and drivers in China and Japan are clearly different." While Japan has far less growth to count on, it already has the world's second largest pool of personal assets. And the fact that UBS has already been in the country for 50 years makes a difference. As for China, it "represents a wealth management opportunity that will play out in the next years." Ermotti went onto explain that China has only 1% of deposits invested abroad, and it is these assets that are waiting to be unleashed.

While seeing opportunities in Asia, Ermotti's major concerns lie at home. It has been more than 18 months since the Swiss National Bank introduced negative interest rates in attempt to deflect the upward pressure on the franc. "As a bank, you of course prefer to do business in a positive rates environment, as negative rates are bad for our business." Claiming that he does not see "any positive ramifications in our economies," he went on to to say, "I see a lot of potential unknown risks, for example for private savings as well as private and public pension funds."

UBS already passes on the cost of negative rates to its institutional customers. It hasn't done so for private clients, yet. "Charging negative rates, in a deflationary environment, isn't something that clients would accept easily. If we did, it would be better to hold your cash in a safe," he argued. But he mentioned it is not totally off the table either.

Furthermore, there is the issue of immigration. In a February 2014 referendum, the Swiss -- albeit by a close margin -- chose to limit the inflow of migrants, which would mean breaking free movement agreements with the European Union. Swiss companies that have benefited from foreign labor may not be able to do so anymore, or worse, the EU may reciprocate.

Ermotti sees the situation as not unique to Switzerland. "Look at France, Italy, and Germany lately, but also Spain and Nordic countries. And in the U.S. where there are more voices of protectionism." 

According Ermotti, UBS employs 20,000 people domestically, and is the country's third largest private employer. "We depend on having access to a qualified work force." But he implied the threat is greater to Switzerland as a whole rather than UBS itself. Half of the 20,000 serve UBS' global businesses. "Theoretically, they could be anywhere in the world." So the country needs a solution that addresses "the political situation and the needs and desires of the population" and "access to a qualified work force."

As the consequence of another referendum, UBS will have to make decision on its London office as the U.K. prepares to leave the EU. Banks based in London relied on an "EU passport" to operate across Europe's financial markets. Ermotti has repeatedly expressed that it is too early to call the decision, "but, we are well prepared for any outcome."

Will moving its EU headquarter be a big burden? Ermotti explained, "We currently employ more than 5000 people in London and probably 20% to 30% of our workforce could be affected." And he emphasized this. "We believe that London will continue to be an important financial center, although maybe not as important as it is today."

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