Transcript: EXCLUSIVE CNBC INTERVIEW with Axel Weber, Chairman, UBS

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All you need to know.

Interviewed by Carolin Roth and airing 16/09/2015

Carolin Roth (CR):

UBS is the biggest wealth manager in Asia. You've got roughly 275 billion dollars under management there. Just how worried are you about the slowdown in the economy and the volatility in the stock markets?

Axel Weber (AW):

Well we are at the point where we are likely gonna see the turning of US monetary policy. And that's always been a moment for the world economy but the world economy is going through some volatility. So I think most of what we're seeing at the moment in the market is a global reorientation of markets around the Fed, which is the largest central bank in the world, at least it's the largest treasury market, reorienting cores. And of course the slowdown in China is noticeable but it was by design. The G20 asked China to rebalance growth from being externaly driven to be more domestically driven. And China is going through a policy adjustment. The central bank just eased monitery policy and is likely to continue to ease further so, medium to long term I'm not concerned about China. I'm not concerned that the authorities will not get on top of things but there was some recognition lag, there was some implementation lag in anti-cyclical policies and we've seen some major changes happened since then. So I think the situation will be stabilizing. I'm not that concerned.

CR:

But what does it mean for you, for UBS, the biggest wealth manager in that region. Would it be a big mistake to pull back from that region now because of the weakness that we were seeing this summer?

AW:

Absolutely, and I think you know, if our major competitors do that, that would give us a much better chance in the future. If you look at long term growth around the world, we live in a world now, basically the world will be moving to a 7 billion from a 5 billion world. And we're at 7 billion now, and we will be moving to 9 billion in the future. Most of that population growth, most of that growth in the economic activity is in Asia and long term, the Asian economy already – 4 out the 7 billion people globally – live in Asia. 1 billion in Europe. 1 billion in Americas, 1 billion in Africa. Going forward, it will be 5 billion in Asia, 2 billion in Africa. So the banking markets of the future is where the clients are and the clients will increasingly be in Asia. And this short term set back that we're seeing through an adjustment of policies in china and the rebalancing of growth, in my view, is medium to long term healthy for the Chinese economy.

CR:

But you can't deny the fact that there are many question marks around the credibility of what the offcials are doing and how they're managing that volatility. And also the credibility of the data. Do you trust the data? Do you trust the officials?

AW:

I think it's much less important whether the Chinese economy grows 6% or 7%. If you're micro managed and excessively focused on 7.0 versus 7.1, yes there are some doubts on the quality of the data. But by and large, the bigger picture, the Chinese economy will be growing well in excess of 6%. If it is growing well in excess of 6%, it's growing more than twice as fast than the US economy. China is already half the size of the US economy and it will continue to catch up with the American economy. It will continue to have population growth, so Im not overly focused – like the market and many in the market are – on the short term, on the day. I had a medium to long term policy perspective in my old job and I brought it to my private sector job. I'm not concerned about the current correction in the market. I think it's a healthy correction in the market, it is needed. You cannot have a stock market that grows around 100%, you know, within half a year. That is not a sustainable growth. And the correction we are seeing now, brings that market back to a more sustainable market and I think that is the absolute, the right picture. And we stay focused on the medium to long term picture.

CR:

And as we saw for UBS in the second quarter, as was the case for so many other banks, you must welcome some of that volatility that was on China.

AW:

I don't welcome volatility. Volatility is not really good for markets. But in general, I think that a more adequate pricing, the more reasonable ratio between real economic growth and growth in stock markets and growth in capital earnings is absolutely vital. So, in that sense, the correction in the market brings that market much more aligned with its fundamentals. I'm really more concerned about growth that is not in line with its fundamentals, that is not in line with an adequate pricing of risk in the market. We saw some of that. I think we're seeing a more adequate pricing of risk and in that sense, I'm not concerned about it. I think UBS – because we're a wealth manager focused on helping clients solving generational problems – we naturally have a medium to long term perspective. We're not a hedge fund. A hedge fund would have, excessively is focused on the next policy decision, on the day to day volatility. We're a medium term oriented institution. We look at the medium to long term and we think that the medium to long term potential for China continues to be there, despite what many short term oriented players in the market think.

CR:

But one policy action that even you at UBS can't ignore is what the Fed will be doing this week. Will they, won't they. Or should they or should they not?

AW:

My last job was about should they or should they not? When I was a policy maker. And would have never commented on the Fed then because I was taking policy decisions in the ECB. My views is, if I look at the underlying economic data, the underlying strength of the US economy, the upgrade of the first quarter – well many said it was a really bad first negative quarter – it's been upgraded to 0.6 in the positive territory, we had a very good second quarter. The underlying economic data in the US warrant a rate hike. The economy, the US economy can stand it, the US economy in my view actually needs it, medium to long term, and I'm pretty convinced the US will see a rate hike most likely in September. But again, I'm not focused on the next policy decision. If they move in November, they will move in the medium to short term. Rates will start going up and they need a longer term anchored communication process to make clear that the current turn around in policy will be followed by a moderate and more adequate sort of rising of rates. I think getting the medium term communication right for the FED is much more challenging than getting the first move right.

CR:

I think you hit the nail on the head because a lot of focus is on the timing of their first rate hike, whether it's September, October or December. But I think the bigger focus should be on the magnitude of the hikes, over the next year, over the next 18 months or so. Do you think that we will see a 1994 Greenspan-like succession of rate hikes?

AW:

No, the FED already made clear that they will basically raise rates in a more balanced and in a more stretched out way. They will do a moderate tightening of rates. I think the FED in the current cycle, until the end of this conjunctural cycle, will probably not get above 3 at most, 4% rate. They will not go to the levels of rates in the past. Which causes a new problem. What will the FED do, if then the economy cools again and they need room to manoeuvre, to lower rates. It will be at the lower bound again rather quickly if they take similar strong rate decline with a couple of steps. So it's all about the medium term perspective. And I think the medium term perspective for the world economy and for the US economy is the FED should start raising rates sometime soon. It should do that at moderate protracted pace. I think that in that sense, the market can reprice it rightly and by and large, I think that's what the market is today.

CR:

Interesting BIS paper over the weekend saying the FED will lead the charge in terms of the tightening cycle. Do you actually think that so many other central banks will follow suit? Because many of them are still firmly in easing mode.

AW:

That's true and to some degree, the world has been diverging. If you talk about the major central banks, I think, we used to talk about the bias in monetary policy and in that sense, I think the ECB still continues to have an easing bias, same as the bank of japan. There is no imminent easing action that they talk about but they clearly have a bias that more likely we are gonna see further easing moves in Japan and the Eurozone than a tightening like in the FED. This will not stop the FED, this will probably have only an impact on the speed and on the magnitude of rate hikes and how frequent they occur. So I think the FED will move, you know, at best at every second policy meeting, which basically means they can move by a hundred basis points over a year which is way lower than some of the moves we've seen on the past. And I think the market will then, in some sense, also look at the dollar relative to the Euro, or the Japanese Yen differently. And I can see a renewed pressure on the dollar to appreciate going forward, I can see a renewed sort of fall in the Euro and a fall in the Japanese Yen as a result of a sort of start of the rate hike cycle in the US and, probably now followed at this point by Europe and by the Japanese. Maybe the BoE is in the camp of those central banks that might follow suit. But they will give themselves some time to not immediately move in synch with the FED.

CR:

Absolutely. What is the risk for the ECB and also for the BOJ, to keep easing, to keep monetary policy too loose for too long? I mean a number of people have come out in the last couple of days Wolfgang Schaeuble for example Robert Schiller, there are bubbles in these markets do you sympathize with that view?

AW:

I held the view along so I think the ECB at the moment is embarking on a ground and scale of asset purchases and that has a number of downside risks. The first one is rather than buying time for governments to do the right reforms, it actually buys time for governments not to do anything and we have seen really government action been rather sporadic in Europe. Yes there is some action in countries like in Spain, we are starting to see some actions come out of France and of Italy but it's not been a great scale sort of turnover reform agenda that we have seen. And to some degree, the Central Bank buys governments the time because they isolate them from market pressure by buying their bonds in terms of the financing cost for this program. So that is one downside risk and I usually talk about that because I think this is the most imminent risk. Medium to long term, the very low interest rate environment has led to a very strong division between winners and losers from these policies. On the one side pension funds, longer term investors suffered from the fact that there is 0 interest rate, even negative interest rate environment and basically debtors and creditors receive an uneven reward from these policies. So the creditors suffer because they don't get an adequate return on their credits. And the debtors gained because basically they can fund for free in the market now.

CR:

Two weeks ago Mario Draghi hinted at the fact that he might have to gear up the asset purchase programme purely from a price stability mandate. That would be wanted wouldn't it?

AW:

Well purely from a price stability mandate there is a lot of things that the ECB can or can't do about prices. I think that if you look at where the prices are now a large part of why prices have come down in the Eurozone, is actually because of the collapse of commodity prices because of the collapse of oil prices, there is a lot of base effects that come in and Europe is in an area where basically the economy is very weak, there is some contribution the ECB can have to strengtheninf the economy largely through the exchange rate channel because the credit channel and the interest rate channel don't work at 0 rate so it is the exchange rate channel and the wealth channel through which the economy could work. Now that's a different channel in a bank-based system like Europe than it is in a capital-market based system like the US. So I think the ECB will have a very very limited impact on prices going forward with the current policies and I don't think the ECB, whatever they do can inflate the economy to go back to a price target of 2% at this point in time. There's just an adverse movement in commodity prices, the economy is weak and the ECB won't solve these problems.

CR:

What can re-inflate the economy?

AW:

Better growth but better growth doesn't come from monetary policy stimulus , it doesn't come from fiscal policies, it comes from investments, it comes from corporates taking investment decisions. Now if you look at Europe, some of the big problems Europe has is that corporates are uncertain about the European environment. European investments are not drawn globally. If Europe wants to just raise the capital that they need for investing internally, which is what central bank action can do, I don't think they will get back to a reasonable growth. Europe needs to attract global capital and for attracting global capital it needs to be an open capital market union, it needs to do a lot of things in terms of reforms so that corporates know they are reliable labour laws, they know that there is investment opportunities, that they know there is a tax system that is reliable. At the moment, European taxes are going north, wage disputea, strikes among airlines in Germany, there is a lot of things happening in Europe that for any global investors don't make Europe a very attractive global investment location. I think that is part of the problem of Europe, Europe has got to get its story right on why investing in Europe and contributing to European growth rather than investing in Asia or in America is the better decision for global corporates. And that story is not usually helped by the Central Bank doing QE, it's other policy levers that need to be pulled and we are not seeing that at the moment.

CR:

I want to move on and talk about the industry that you operate in, you have unveiled your big strategy three years ago, you are simply in the process of executing your strategy. As you do that, what are still the biggest challenges for you, for UBS? Is it Basel IV Is it tougher Swiss capital requirements? Is it China? What is it?

AW:

Well I think the challenges are that we are in a, still in a fragile state of the world economy. I think the banks have done a lot, really over the last three years to strengthen their capital ratio to become more resolvable, I think in terms of what we are doing, we basically tick many of the boxes on the capital, liquidity planning, on resolvability. We are now in the mode of executing our legal transformation that helps resolvability, for example we just recently started the largest bank in Switzerland, UBS Switzerland AG. We are now in the process of setting up a UBS intermediate holding company in the United States that will home our UBS Americas World Management business and the IB there. So the legal transformation is what we are currently focused on. Medium to long term I think a large part of the re-regulation is actually done, our capital ratio is north of 14% in terms of risk rated asset and we are building our leverage ratio so I think we are getting to the end game on regulation. I would say in American football you talk about innings, I would say on regulation we are probably in the 7th or 8th inning, we are seeing the end of that. But there are other issues, we are very much focused on how we do business, take the normal business off integrating fintech, financial technology into wealth management and into what we do. A third of UBS is already a tech company, we need to really get on top of this technological challenges and I think that is another focus in running the business effectively and in a cost effective manner where we are now focused rather than on the big topics of capital and the strategy of the bank, it's implementing that strategy in an efficient way, being, you know, good on cost control, being effective on the services that we offer. That's our current focus.

CR:

But still for many banks out there, maybe not for you, but many banks are still dealing with legacy issues. It's very very tough to reset the sentiment towards the industry, towards the employees who are working in it. In the UK we have a got a new Labour party chief, and his shadow chancellor he's called bankers 'jokers' . Do you believe that it is impossible to reset that image for the banking industry or do you think it's even warranted given everything that's been going on?

AW:

I think the whole financial crisis revealed that there were many, many weaknesses and wrong incentives in the financial system. So I think everyone's got to take their fair blame for the financial crisis happening, whether it's on the regulatory side or the side of financial markets, of banks, clearly a lot of things were not right and we're putting them right. And I think we've gone a long way in already putting it right. I think you will see that banking will come back and be taken seriously because our economies cannot live without capital and in Europe the capital markets are not yet as developed as they are in the US. Europe has a big program called the Capital Markets Union Program that Commissioner Hill is focused on. But it's largely about removing internal barriers to capital markets and have a free flow of capital within the union. It's much less at this stage about open capital market borders and attracting global capital to Europe, which should be the second part of that agenda. And so I think as we go forward, I think the financial markets and banks, in playing a key role to the access to capital markets, will come back. It's been a time now – 7 years –and I think the bankers are doing what they can to move forward. And I think we really shouldn't discuss that in an emotional way. You know, blaming and shaming is something that we should leave behind. We should really focus on what is the purpose of banks and do they fulfill it. I can tell you what the purpose of UBS is – it's being a global wealth manager , it's being bank number one in Switzerland and we're working every day to fulfill that purpose, to work with our clients globally.

CR:

You're a global bank in Switzerland, that also meant for much of this year you've had to deal with a very strong Swisse. It's weakened somewhat over the past few weeks. That's been very surprising to many as it really hasn't acted as the safe haven currency , that role that it's really played in the past. The SNB is meeting this Thursday. When do you think they should be normalizing their policy?

AW:

Well I think the SNB is firmly on hold for some time to come. So I think the policy debates in Switzerland are more about whether the current market pricing of the Swiss franc in line with other currencies is adequate and supports the economy. I don't think there's any discussion at this point about using the policy tools. I think Switzerland still has a negative inflation rate. Switzerland is still in a stabilization phase. It's a small open economy and of course commodity prices and energy prices have contributed to this decline in prices, but I think the focus in Switzerland is more about – there's some public debate whether they should go back to the system of targeting the exchange rate or having a floor. I don't think they should and I don't think it will happen. I think the other debate we have here in Switzerland is really have interest rates gone negative enough? In my view they have, actually the current negative interest rates are a challenge for many long-dated investors, so pension funds, insurance companies find it very hard in the current environment. And we're more likely going to see questions and discussions around can we actually take off some of these very negative interest rates and the pressure it provides in order to have an easier environment. But again it's not a discussion for now. I think the SNB is firmly on hold for now.

CR:

Finally, before I let you go, I know you are a busy man, what is the conference today, what is it all about? Why is it so important for UBS?

AW:

Well it is the future of growth and of course the future of growth is very important because for us we want to be there where our future clients are. and usually economic growth, economic activity creates entrepreneurship and many of our clients are on the one hand, one hand side, entrepreneurs who when they basically IPO their company become also private wealth management clients. and many of them are from emerging markets. Emerging markets are going through a rough patch at this moment but I think it would iron out. And therefore it is very important to really talk with these clients in emerging markets but also here in the established world about where are the opportunities for growth in the future. And that's what we are doing here with the family offices which are our big clients and it is a very interesting discussion because these clients know very well because they are part of this growth story in emerging markets.

 

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