Goldman Beware: UBS, via China, May Be New Stock King (Update2)
By Cathy Chan
Jan. 22 (Bloomberg) -- If anyone overtakes Goldman Sachs Group Inc., the worldwide leader in selling stock, it probably will be UBS AG.
UBS, Europe's biggest bank, last year arranged more equity sales than Morgan Stanley and Citigroup Inc. for the first time, according to data compiled by Bloomberg. The Zurich-based company now trails only Goldman after tripling its share of the market since 2000 by targeting issuers in China.
``You would have thought it would be a U.S. bank that's nipping at Goldman's heels,' said Alison Sinclair, a fund manager at Glasgow-based Resolution Plc, which manages about $70 billion and holds UBS shares. ``UBS is a stealth player.'
UBS handled more equity deals in 2006 than any investment bank has in at least seven years. It arranged 247 share sales that raised $50.2 billion, compared with Goldman's 183 for $59.3 billion, Bloomberg data show. To oust New York-based Goldman, the Swiss bank needs to maintain its lead in Asia, where companies are tapping the equity market at the fastest pace anywhere.
``Being strong in Asia Pacific is becoming ever more critical to investment banks and their standing globally,' Huw Jenkins, chief executive officer of UBS's investment bank, said in an interview.
Asia now accounts for more than a third of global equity offerings, up from 20 percent five years ago. Chinese companies will sell as much as $55 billion of stock in 2007, up from last year's $50 billion, Jing Ulrich, JPMorgan Chase & Co.'s Hong Kong-based chairman of China equities, said in an interview.
President Roosevelt
Rob Rankin, 43, has led UBS's efforts in China for the past three years after the bank assigned him to kick-start a business that was generating less than $100 million of annual revenue. Rankin, a 16-year UBS veteran who formerly ran the Asia-Pacific telecommunications, media and technology group, pledged to more than double investment-banking revenue.
He began a campaign to boost bankers' morale, sending the team copies of a 1910 speech by former U.S. President Theodore Roosevelt that extolled the virtues of those people who dare to take risks. His team gathered at Bangkok's Banyan Tree hotel in January 2004 after UBS was hired to arrange the Singapore-based luxury hotel chain's S$232 million ($150 million) initial public offering.
Rankin made it clear that China would be pivotal to winning Asia, handing UBS bankers copies of two books: James McGregor's ``One Billion Customers,' and a lesser-known work by Carl Crow from 1937: ``400 Million Customers.' While the opportunities had grown, he told them, the challenges remained the same.
Bank of China
UBS began to cultivate relationships with clients including Bank of China Ltd., the nation's second-biggest bank, China Communications Construction Co., the country's largest port builder, and China Merchants Bank Co. UBS helped the three companies sell first-time shares in 2006, earning about $160 million in fees. UBS also is sitting on a paper profit of $1.27 billion from the Bank of China stake it bought last year before the Beijing-based company's IPO.
In all, UBS arranged $19.4 billion of Chinese share sales last year, compared with Goldman's $15.7 billion, Bloomberg data show. UBS was hired to help manage planned offerings for China Railway Engineering Group Co. and Wuyi International Pharmaceutical Co. It worked with Goldman on last year's $11.2 billion initial share sale by Bank of China.
Goldman has beat UBS to the sale of yuan-denominated shares for Bank of Communications Ltd. and Ping An Insurance (Group), which may raise about $10 billion. Goldman also won a role to arrange an offering in Shanghai for Ningbo Commercial Bank later this year. Goldman spokesman Peter Rose declined to comment.
Most Important
``China's domestic market will be the most important in Asia and the fastest-growing piece of business globally, so being early there is essential,' said Tian Qing, a Beijing- based fund manager at CCB Principal Asset Management Co. ``Goldman's brand and business will definitely get a boost from these big China deals, so it'll be hard for UBS to compete in the short term.'
Investment-banking fees from China more than doubled in 2006 to $200 million, Rankin said.
``As soon as we got China right, we got the whole of Asia right,' said Rankin, who's based in Hong Kong. ``This is the real growth battleground for the securities firms globally.'
The UBS Asia investment-banking team has doubled since 2003 to about 180. The Zurich bank is likely to win the remaining licenses required to do domestic sales in China in the first half of this year.
Stronger Team
David Li, 45, joined from state-owned China Merchant Holdings International Co. in June 2005 to set up a Chinese brokerage. Last year, UBS also hired seven bankers from BNP Paribas Peregrine to win new business from private companies in China. The BNP team, led by Henry Cai, 52, has already won four Chinese underwriting assignments, including Dalian Port (PDA) Co. and Shanghai Jin Jiang International Hotels (Group) Co.
The UBS team has also been stable. Steven Sun and David Chin, co-heads of the bank's financial institutions group in Asia, have been with the firm for seven and 12 years. He De, vice chairman of investment banking, joined in 1997. The team worked on UBS's first China deal: the $2.6 billion share sale by BOC Hong Kong Ltd. in 2002. The same team helped BOC's parent, Bank of China, on its IPO.
M&A Too
UBS also had its best showing in mergers and acquisitions in Asia excluding Japan, where it overhauled Goldman to take the top spot, according to Bloomberg data. Citigroup Inc. pushed Goldman into third place.
In the last quarter, the Zurich bank advised on $12.8 billion mergers and acquisitions including Bank of China's purchase of Singapore Aircraft Leasing Enterprise and Standard Chartered Plc's acquisition of Hsinchu International Bank. It also helped Orient Overseas (International) Ltd. sell $2.35 billion of North American ports to Ontario Teachers' Pension Plan, Canada's third-biggest retirement-fund manager.
UBS still has a long way to go to catch Goldman on the fees it gets from arranging share offerings. Goldman, the world's biggest securities firm by market value, earned about $2 billion from selling stock last year, compared with $1.5 billion for UBS, Bloomberg data show.
In the U.S., where fees for selling stock are about twice what they are in Europe and Asia, UBS remains an also-ran. It ranked seventh in 2006 with a market share of 6.1 percent, according to Bloomberg data. Goldman was first with a 15.1 percent share. UBS was third in Europe after New York-based Morgan Stanley and JPMorgan Chase & Co.
`Global Success'
``Global success will become ever more dependent on implementing the kind of approach that is now bearing fruit for UBS in Asia Pacific,' said Jenkins, 48, who spent his career running equities departments in Asia and the U.S. for UBS before becoming the investment bank's CEO in 2005.
In Asia excluding Japan, where UBS ranked first last year with 11.6 percent of the market, the Swiss bank earned average fees of 2.7 percent, according to Bloomberg data. Goldman's fees were lower at 2.5 percent, the data show. The last time UBS earned higher fees than its New York rival was in 2002, when Goldman had 23 percent of the market and UBS trailed in fifth place with 5.7 percent.
UBS missed China's first two stock booms, in 1997 and 2000, when companies rushed to sell shares as stocks soared. In 2000, mainland companies raised $13 billion through IPOs, including a $5.6 billion sale by China Unicom Ltd., the nation's second- biggest mobile-phone company.
During the late 1990s, UBS was too distracted by its own mergers to focus on Asia, Rankin said. Swiss Bank Corp. bought London-based S.G. Warburg Plc in 1995 to create SBC Warburg. Three years later, it merged with Union Bank of Switzerland to form UBS.
`Internally Focused'
``The group was probably more internally focused than it should have been,' Rankin said. ``The merger was a big distraction in some markets, particularly in Asia.'
By 2000, UBS trailed Morgan Stanley and Goldman in Asia outside Japan. It had a 1 percent share of the market for stock sales, compared with more than 14 percent each for those two rivals. Now, UBS is well-positioned to take advantage of investment-banking revenue that's increasing by 20 percent to 25 percent a year in Asia, Rankin said.
The growing risk that China's stock rally will falter may stymie UBS's global ambitions. The Shanghai Composite Index has more than doubled since reaching an eight-year low in July 1995. The nation's stocks are valued at 31.6 times forecast profits, double the average for developing markets.
UBS itself said in a Jan. 15 report that the Shanghai index, which tracks the bigger of China's two stock exchanges, may fall more than 20 percent this year.
China Pipeline
``It's really hard to say if the market can generate a similarly strong business pipeline for investment banks in the next two years,' said Wu Yanran, an analyst at Beijing-based New Century Fund Management Co. who tracks China's financial- services industry.
Rankin said he can't afford to be complacent after UBS lined up about 20 initial public offerings for China this year. On a cold Hong Kong day just before Christmas, he and members of the China team huddled on the corporate boat, Swissy II, and discussed how to avoid being overwhelmed by their success.
``Some banks declare victory too early,' Rankin said. ``The battle has only just begun.'
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