Our investment banking and securities business provides innovative solutions, independent research and advice for our corporate, institutional, intermediary and alternative asset management clients through complete access to the world’s financial markets across all product classes. We are a global leader in the services we provide and the leading risk manager in our industry.
For the year ended or as at | ||
CHF million, except where indicated | 31.12.05 | 31.12.04 |
Total operating income | 17,484 | 16,083 |
Total operating expenses | 12,303 | 11,473 |
Business Group performance before tax | 5,181 | 4,610 |
Personnel (full-time equivalents) | 18,174 | 16,970 |
The Investment Bank is a global investment banking and securities firm. Our salespeople, research analysts and investment bankers, supported by our risk and logistics teams, deliver advice and execution to clients all over the world. In addition to serving the world’s key corporate and institutional clients, governments and financial intermediaries, we work with financial sponsors and hedge funds and indirectly meet the needs of private investors, through both our own wealth management business and other private banks.
For both our corporate and institutional clients and the individual clients of other parts of UBS, the Investment Bank provides innovative products, research and advice, and comprehensive access to the world’s capital markets. Client demands are always changing, so we continually adapt our range of products to remain competitive. This means that we invest in new areas, making our overall portfolio less sensitive to demand cycles in individual products and keeping control of cost and risk.
Our corporate client financing and advisory business is a market leader whose strengths lie in providing advice on cross-border mergers and acquisitions and raising capital for companies and governments. We have always been among the leaders in European corporate finance, and we have experienced very strong growth in the US and Asia Pacific in recent years.
We are an important partner for institutional clients, with particular strengths in equity research and distribution as well as in structuring and distributing fixed income cash, derivatives, and commodities products. Our risk management skills run across all product areas, covering cash and derivative products, and we make use of them to provide a broad array of risk management products for both our institutional and corporate clients.
We also manage cash and collateral trading and interest rate risks on behalf of UBS, while executing the majority of securities, derivatives and foreign exchange transactions for the firm’s individual clients. Our risk management capabilities, treasury funding, and distribution services are among the many qualities which have enabled us to be pre-eminent in this field. We are now reinvesting in the business to expand the scope and functionality of our e-commerce platform.
To core clients and to important new clients, we offer lending products to support their financing needs, although risk / return considerations still determine balance sheet usage. We also provide them with bridge financing, in line with our strategy of further expanding our leveraged finance and high yield business.
Our headquarters are in London and New York. We employ roughly 18,200 people in 34 countries around the world. Our businesses are run functionally on a global basis and organized into the three distinct areas of:
– Equities
– Fixed income, rates and currencies (FIRC)
– Investment banking.
Although we generally pursue a strategy of organic growth, we also take the opportunity to enhance our franchise with acquisitions where necessary. In 2003, we strengthened our equities business by acquiring ABN Amro’s prime brokerage business in the US. In 2004, we bought Charles Schwab SoundView Capital Markets, the capital markets division of Charles Schwab. In order to expand our trading technology, we acquired Prediction Company in November 2005, a financial engineering and trading software company. This specialized group will contribute to the development of our trading infrastructure.
In July 2005, UBS’s highly successful municipal securities business transferred into our fixed income area from the US-based wealth management business. We also announced a plan to transfer our principal finance and commercial real estate trading businesses, currently part of the fixed income area, into Dillon Read Capital Management, a new alternative investment management business within Global Asset Management.
The Investment Bank operates through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer.
As a global investment banking and securities firm, we compete against other major international players such as Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley.
Equities
The Investment Bank is a leading participant in the global primary and secondary markets for equity, equity-linked and equity derivative products. We sell, trade, finance and clear cash equity and equity-linked products. We also structure, originate and distribute new equity and equity-linked issues and provide research on companies, industry sectors, geographic markets and macro-economic trends. We are a member of 108 stock exchanges in 35 countries. This multi-local approach allows us to deliver the advantages of our scale and global reach to clients regardless of their home market.
Our equity research supplies independent assessments of the prospects for approximately 3,000 companies (corresponding to some 80% of world market capitalization) across most industry sectors, and all geographical regions, as well as economic, strategy, quantitative and derivative research. We consistently have more highly rated analysts than any other broker globally, according to Starmine, which measures analysts based on the return of their stock recommendations. We also ranked first in Institutional Investor’s surveys of equity research analysts in Europe, Asia, and Latin America and are highly ranked in Japan and the US.
By carefully coordinating the efforts of our regional and product distribution teams, we have built the world’s leading cash equities business. This offers liquidity and efficient completion in executing orders in every major world market. According to a leading industry survey, we have had the largest global market share in secondary cash commissions for the last 14 consecutive quarters. In fact, one in nine shares traded globally is handled by UBS.
We are also a recognized market leader in derivatives, being named the number one brokerage firm in equity derivatives in Risk Magazine’s corporate end-user survey in 2005. Risk management products remain among the segments of our business with the fastest pace of growth, and we will continue to focus on providing innovative and customized investment solutions to institutional and corporate clients, including other parts of UBS.
Our equity capital markets team manages many of the world’s largest and most complex transactions, demonstrating the cross-border nature of our relationships and the strength of our distribution network. We have built a leading global position as a distributor of block trades, rights offerings, initial public offerings, and hybrid and convertible issues to both institutional and private clients in every market.
We have made significant investments in our technology platform, and are recognized as a market leader in providing a number of electronic services, such as equity research and trading, to our clients. Our focus on technology allows us to adapt and continuously improve our business processes and client services.
Our prime services business provides integrated global services, including stock borrowing and lending, prime brokerage and exchange-traded derivatives to our rapidly expanding roster of hedge fund clients. We have continued to invest globally in people and our technology platform to position ourselves to be a leader in the industry and strengthen our global cross-product capability. We have made significant strides in building our prime brokerage business and have now climbed to the fourth rank globally, according to published competitor research reports.
Fixed income, rates and currencies
Our fixed income, rates and currencies business delivers a broad range of products and solutions to corporate and institutional clients in all major markets. With professionals working in the Americas, Europe and Asia Pacific, we offer our clients global service in our four major business lines:
– credit fixed income, incorporating credit trading and credit derivatives
– rates, incorporating interest rate derivatives, residential mortgages, government bonds and energy trading
– municipals, incorporating origination, retail trading and distribution, derivatives, short-term trading and institutional trading
– FX/CCT, incorporating foreign exchange, cash and collateral trading as well as base and precious metals.
Our approach to products and markets varies. Where there is enough potential for risk-adjusted returns, we seek market share leadership in high-volume, liquid markets. Our global origination and distribution platforms, as well as our highly regarded research capabilities, underpin our major business lines. In research, we ranked first in European Fixed Income Strategy in the Thomson Financial Extel survey for the second year running, first in European Investment Grade Research by Institutional Investor, and second in Fixed Income Research in Asia by FinanceAsia.
Our capital markets and distribution teams have also achieved high accolades, being named Euroweek’s Best Provider of Support in the Secondary Market, and Best Lead Manager of Financial Institutions Bonds as well as ranking first in Orion’s Emerging Markets Sales survey. We were also recently named 2005 Swiss Franc Bond House of the Year by IFR. Our municipals origination business is a clear market leader with a 12% market share in the United States, and it has been in the top two positions in league tables for the past nine years, according to Thomson Financial.
Based on our unique risk management and distribution capabilities, we are a market leader in foreign exchange and cash and collateral trading. The close integration of FX, money market, repo and metals creates significant client, processing and risk management synergies. Scale is the foundation of our business model as we run these businesses on a highly automated and integrated basis, with an award-winning suite of e-commerce tools providing direct interfaces between our sales force and clients.
Our top positions in a vast series of industry surveys and rankings show the success of our businesses and our FX research. In 2005, we were named Currency Derivatives House of the year by Risk magazine and were ranked first in Euromoney’s technology awards for FX. Over the course of the last five years our volumes have outgrown the market. We are also a market leader in precious metals, trading both non-physical spot, forwards and options as well as physical precious metals. We are rapidly expanding in base metals as well, having become a member of the London Metals Exchange in summer 2005.
We are seeking to expand our fixed income business further by pursuing opportunities in credit, high yield and asset-backed securities. We will expand our leveraged finance and high yield appetite and extend our client footprint in debt capital markets. Within asset-backed securities, we will match our strength in the agency business with non-agency and sub-prime business as well as developing local currency asset-backed and mortgage-backed securities. We are also reinvesting to expand our FX e-commerce platform and deliver a suite of services tailored to meet the demands of each client segment.
Investment banking
In the investment banking business, we provide first-class advice and execution capabilities to global corporate, financial sponsor and hedge fund clients. Our services include advising on mergers and acquisitions, strategic reviews and corporate restructuring solutions. In partnership with other business areas of the Investment Bank, and other Business Groups, we also arrange the execution of debt and equity issues worldwide.
Our business has grown dramatically since 2003 as we have captured the upside of the market rebound through strategic hiring and a number of fill-in investments across our regions. In 2005, we established the Alternative Capital Group to cover hedge funds, the Strategic Solutions Group to increase our penetration of Fortune 500 companies in the US and the Life and Pensions Solutions Group in Europe. In 2006, we will focus on leveraging our global platform and enhancing the scope and quality of the products and services we offer our clients.
In 2005, we assisted our clients in a range of merger and acquisition transactions and capital markets issues. Some of the more notable mandates included:
– joint financial advisor to Gillette on its USD 57 billion sale to Procter & Gamble
– lead financial advisor to Gas Natural on its USD 47 billion public tender offer for Endesa
– joint global coordinator / bookrunner on the USD 4.6 billion follow-on global offering for Central Japan Railway
– joint bookrunner on the USD 2.2 billion global primary and secondary equity offering of American Depositary Shares (ADSs) and ordinary shares in LG Philips LCD
– dealer-manager on the USD 81.8 billion debt exchange offer for the Republic of Argentina
– joint bookrunner on a EUR 3 billion two-tranche unsecured bond offering for Deutsche Telekom
– joint lead arranger and joint bookrunner on USD 2.2 billion of financing in support of the USD 2.3 billion leveraged buyout of MeadWestvaco’s coated papers business and associated timberlands by Cerberus Capital Management.
We participated in some of the industry’s largest and most complex transactions this year, reflecting our strategic goal to expand our global client franchise. To maintain our competitive position, we will continue to invest in our growing US business and protect and enhance our strong positions in the European and Asia Pacific markets.
Companies still have strong balance sheets and cash flows, leading us to expect current M&A levels to continue. While tight credit spreads will continue to be positive for debt underwriting and trading, a slight increase in credit defaults may lead to a flat to slightly smaller fee pool in debt capital markets.
CHF million | 2005 | 2004 | 2003 |
Corporate finance fees | 1,460 | 1,078 | 761 |
Equity underwriting fees | 1,341 | 1,417 | 1,267 |
Debt underwriting fees | 1,516 | 1,114 | 1,084 |
Other capital markets revenues 1 | 436 | 294 | 471 |
Gross capital market and corporate finance fees | 4,753 | 3,903 | 3,583 |
Capital market fees booked outside investment banking 2 | (943) | (813) | (819) |
Amounts shared with equities and FIRC | (1,182) | (991) | (1,017) |
Financing, hedging and risk adjustment costs | (122) | (184) | (44) |
Net investment banking area revenues | 2,506 | 1,915 | 1,703 |
Our industry is always competitive, but the strength of the markets and the level of client activity continue to offer attractive investment opportunities. The Investment Bank is positioned to take full advantage of market trends, and we have great ambitions for the future based on an investment program that targets our fastest growing clients and emerging asset classes.
We plan to increase business with our alternative asset management clients – hedge funds and financial sponsors – as well as private clients, who are increasingly seeking yield from alternative asset classes that cut across products and business areas. Specifically, we aim to close the gaps to market leaders in prime brokerage, expand our investment banking franchise in Europe, and continue to grow our footprint in Asia Pacific.
We will also target new business growth in commodities and emerging markets. We are expanding our base metals and energy businesses, driven by client demand. We will capitalize on significant growth and the opening up of financial markets in areas such as China, India, Russia, Brazil, and the Middle East. We will also further expand our fixed income business by growing our credit, high yield and asset-backed securities products organically.
To support these efforts, we are increasing our investment in infrastructure. Our businesses in securities areas continue to commoditize and we must therefore further develop a scalable and convergent infrastructure that allows us to expand capacity at low marginal cost. We will also continue to invest in our employees and make further progress in our human resources strategy – from a business that seeks talent in the market to one that forges talent internally.
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