UBS's Andrea Orcel: How much is a good banker worth?
Did Santander make a big mistake when it backtracked on its decision to name the then head of UBS's investment bank, Andrea Orcel, as its new chief executive officer?
On 15 January, Santander's board explained its change of heart on the sums - reportedly between €40m-50.0m - it would have to pay Orcel to compensate him for the deferred awards which he would lose by changing employers. The bank argued that they were "significantly" higher than what had been anticipated and, even for someone of his calibre "unacceptable for a retail and commercial bank such as Santander".
Coming as it did just four months after the board had formally named Orcel to the post, the decision left market participants completely aghast.
A possible court trial in Madrid over the coming months may help clear up what happened, but leaving City gossip and intrigue aside for a moment (there will be more than enough time for that in future), did Santander take the right decision?
Let's take a look at Orcel's track record.
THE HARDEST TRICK TO PULL OFF: HIGHER RETURNS AND LOWER RISK
Under Orcel, UBS's investment bank succeeded in transforming from an undifferentiated business model reliant on a large (and quite risky) balance sheet to drive profits, like some of its American rivals, to one characterised by competing solely in the selected areas where it could be best in class and deliver returns consistently above cost of equity.
His success, in an age where lenders' profitability, especially in Europe, is being sapped by low interest margins and regulators' requirement of high capital buffers is especially remarkable.
The investment bank's value-at-risk (VaR) - which measures how much money a lender is at risk of losing in a typical day - also dropped, from CHF23.0m (£15.97m) in the fourth quarter of 2012 to CHF10.0m as of year-end 2018, as the volatility of the earnings from Orcel's unit declined by over half.
Meanwhile, the IB's so-called Level III assets, the most difficult class of investments to value - so much so that even regulators give banks leeway when doing so, allowing each one to apply its own internal methodology - fell from roughly CHF20.0bn at the end of 2012 to CHF9.0bn by the third quarter of 2018.
And yet pre-tax profit at the unit fattened from CHF500m to CHF1,800m between 2012-18.
Taking into account the IB's right-sizing, which affects comparability, revenues increased by 12% in local currency terms and by 7% in US dollars.
Its investment banking peers on the other hand, were left nursing a drop of 13.5%.
Unsurprisingly, as the capital assigned to the unit declined and profits jumped, the return on attributable equity (RoAE) went from just 2% in 2012 to 16% in 2017, hitting a peak of 31% along the way, in 2015.
Above all else, the Great Financial Crisis demonstrated that it is far easier to be profitable when one throws caution to the wind, with a bloated balance sheet helping to drive higher revenues and profits.
But to boost profitability while simultaneously significantly reducing your risk is an altogether different - and far more difficult - proposition.
BUT IS AN INVESTMENT BANKER SUITED TO BE THE CEO OF A RETAIL BANK?
Some critics of Orcel's appointment had highlighted what they termed as his less than ideal CV to opt to become the chief executive officer of a retail lender.
Everything is opinable - certainly - although as Santander itself said when announcing his appointment at the end of September 2018, Orcel has a "deep understanding" of retail and commercial banking. Yet even if that were not so, the veteran banker has a proven track record of flexibility, best illustrated by Orcel’s lack of experience in sales and trading when he took over UBS Investment bank, which was no impediment to his leading a successful turnaround at both of those units.
He is also a well-respected investment banker, often nicknamed the “banker of bankers” with decades of experience in capital markets and mergers and acquisitions and a long track record of successfully devising and executing strategies that often drove share price appreciation.
Significantly, for nearly two decades he was also the most trusted adviser of its previous boss, Emilio Botin, the current executive chairman's father, who over the course of nearly 20 years transformed a mid-sized Spanish lender into the largest in the Eurozone.
Key to that success was Don Emilio's canniness when it came to identifying and timing potentially transformative deals. He was also apparently more than happy to proceed even in the teeth of deep-seated scepticism from the crowd. This includes a decision to invest in Brazil in the depths of its crisis at the turn of the century, in a unit that today drives a large part of the bank’s profits. He also scooped-up troubled UK mortgage lenders Bradford & Bingley and Alliance & Leicester in 2008.
THE BOTTOM LINE: IT'S NEVER JUST ABOUT PROFITS
It is true that Orcel cut deep when it came to personnel costs, and operating costs more generally, reducing the former by 26% between 2013 and 2018 and possibly earning him more than just a few grudges along the way.
But by rightsizing in a controlled and orthodox manner, likely to the glee of his chairman during almost all of his time at the Swiss lender, ex-Bundesbank president Axel Weber, who is well-known for his very conservative views, he made the entire franchise safer and more sustainable for all its stakeholders.
Those include its shareholders, staff, the counterparties with whom it deals and even the various countries in which it operates.
Indeed, in its 2013 annual report, UBS recognised how Orcel had "guided the business and its employees through a period of intense and sometimes challenging transformation", delivering a "more client-focused, less complex, and less risky Investment Bank [that] delivered significantly higher profitability and outperformed on all its targets”.
In 2015, UBS Investment bank earned the coveted award of bank of the year from IFR, which stated: “How often has any bank been able to lay genuine claim to creating a benchmark for how the business is conducted? Faced with tough decisions about its future amid the chaos of the new order, UBS fashioned an innovative and sustainable operating model that is now a blueprint for others to follow.”
Little surprise then, that in 2018 the Financial Conduct Authority invited Orcel to contribute to a 2018 discussion paper on 'Transforming Culture in Financial Services'.
Fast forward to May 2019, and Santander finds itself facing what some of the most influential observers from the industry, including the likes of the head of Spain’s banking association, Jose Maria Roldan, believe will be an environment not of interest rates “lower for longer” but rather “lower for ever”.
One might argue that such an operating environment calls for having a seasoned chief executive officer with a demonstrated ability to maximise returns in global organisations, even when tasked with keeping a tight lid on costs and not taking undue risks.
Reviewing Orcel's track record, it's little wonder that Santander chose Orcel to oversee its franchise.
So again, returning to our initial question, even if Santander did find itself unexpectedly on the hook for a bigger slice of Orcel’s €40-50m in deferred awards, considering the potential value he may have created, did it take the right decision?