Read the following case to answer the question Itroduction

3.1 UBS Group AG

Since the Bank in Winterthur was founded in 1862, more than 300 financial firms have joined to form what is known as UBS.8 Today the Swiss bank is represented by 60,099 employees in 54 countries and is the fastest growing wealth manager in the world.

Segmented into Wealth Management and Wealth Management Americas, UBSs wealth management provides ultra-high net worth and high net worth customers with individual products in order to fulfill their financial needs. At the same time, UBS operates as Universal Bank in Switzerland serving the whole spectrum of UBSs businesses: asset management, wealth management, corporate and institu- tional banking, personal banking and investment bank services. With a multichannel approach, UBS is a leader in these client segments. A network of offices in 22 countries shows the large scale of UBSs Asset Management segment, which offers a diversified portfolio of investments across all major traditional and alterna- tive asset classes. Supported by research across all these classes, corporate and institutional customers are provided with innovative solutions, consultancy, execu- tion and comprehensive access to the worlds capital markets. The Corporate Center handles all control functions of the UBS Group, including legal, finance and risk control, and provides logistic and support services for all other segments. These include information and physical security, human resources, communication and information technology (Fig. 6).9

The recent economic development of UBS is still affected by the subprime crisis and the net loss of over CHF22 billion in 2008. Following the bail out by the Swiss National Bank, the major restructuring has been necessary to meet the Swiss too big to fail regulations (Fig. 7). These regulations are designed to keep the cost to taxpayers as low as possible by minimizing the need for governments to bail out systemically important financial institutes.10 As a consequence of these restructuring efforts, UBS recovered and were able to increase their total payout per share over the last few years, generating a net profit of CHF6204 million in 2015 (Fig. 8). A segmentation of net profits in 2015 is shown in Fig. 9. Almost 45% of all profits are made in the wealth management segments, Wealth Management and Wealth Man- agement Americas, while Personal and Corporate Banking as well as the Investment Bank segment take a share of roughly 25% each. The smallest portion in terms of net profit is contributed by Asset Management with almost 5%.

UBS is responding to the regulatory environment and evolving market with adjustments to their strategy and business portfolios. UBSs strategy builds on the strengths of all their businesses and focuses on areas in which they excel. This includes capitalizing from growth prospects in all business areas and geographic markets they operate in. The focus of all efforts is on creating a business model that is better adapted to the new regulatory and market environment. The strategy centers on the preeminent wealth management business and the Universal Bank in Switzerland, and builds on the strengths of all the businesses and on the industry- leading capital position.11

The wealth management industry offers attractive developments with robust growth of private wealth accumulation around the world. According to the Global Wealth Report 2015, there is an increase in the number of ultra-high net worth and high net worth people and therefore possible customers.12 Forecasting private financial wealth until 2019, the report forecasts an increase from $155.7 trillion to $210.1 trillion (Fig. 10). The compound annual growth rates (CAGR) show high potential especially in the Asia-Pacific region, Latin America, Eastern Europe, Middle East and Africa. Western Europe, North America as well as Japan are predicted to develop with far lower growth rates for private financial wealth (Fig. 11). This and the converging client needs in Europe led to the strategic decision to consolidate European onshore and cross-border businesses. The combination of the strategic focus on wealth management, unique footprint and capabilities, and the leading position across the attractive ultra-high net worth and high net worth client segments enables UBS to benefit from significant scale, which will help them capture market growth and increase share of wallet. Furthermore the Investment Bank segment is cut down to low risk assets to meet the challenges of the unstable and highly volatile market environment and increasing regulatory requirements. Also, with regard to the regulatory requirements and the subdued revenue environ- ment, there is an increase in operational cost pressure. This has forced UBS to reassess front-to-back processes, to focus on identifying potential standardization, and to rethink the ownership of value chain components.

Over the last few years, investments in financial technology have multiplied. UBS is already the largest employer in the information technology sector in Switzerland and the market expects continued digital disruption in the financial industry. UBS is focused on leveraging the technology not only to improve the services for clients, but also to increase scalability by providing more efficient methods for delivering content to directly access clients and derive the most important information from vast amounts of data for better business management.

3.2 Commerzbank AG

The history of Commerzbank goes back to the foundation of the Commerz und Disconto-Bank in Hamburg in 1870. With its internationalization in 1967 and presence in over 50 countries today, Commerzbank has developed into a financial services provider operating worldwide. After the acquisition of Dresdner Bank in 2009, Commerzbank operates the biggest network of branches in Germany.13

The different segments in which Commerzbank serves its clients are widely spread (Fig. 12). The Private Customers segment with about 1100 branches, direct banking and 12 million customers, represents the second largest retail bank in Germany. The Mittelstandsbank is divided into three group divisions. Mittelstand Germany bundles businesses with small and medium sized customers, the public sector and regional and small and medium sized institutional customers in Germany. Corporate customers with turnovers over 500 million euros are served by the Large Corporates and International Group and the Financial Institutions Group is respon- sible for relationships with credit institutions in Germany and abroad, as well as with central banks.14 Mittelstandsbank offers its customers the complete range of products of an international full-service bank: traditional credit products and customized structured financing solutions, investment and hedging products and products in the areas of cash management and international business. The Central and Eastern Europe segment of Commerzbank includes all activities in universal and direct banking in Central and Eastern Europe represented by the mBank brand. This comprises serving customers in retail, corporate and investment banking in Poland, the Czech Republic and Slovakia.

The investment banking activities of Commerzbank are bundled in the Corporates and Markets segment, which serves not only Corporates and Markets customers, but also customers of other Group segments. The last segment of Commerzbank is the non-core asset run-off segment, where the Commercial Real Estate Portfolio (CRE; 10.3 billion euros), the ship financing portfolio (Deutsche Schiffsbank, DSB; 8.4 billion euros) and the Public Finance portfolio (44.2 billion euros) are bundled in the Group divisions. The Commerzbank bad asset run-off strategy aims to systematically reduce the individual segment portfolios in a way that preserves value and minimizes risk. The aim of this asset reduction is to free up capital so that it can be employed in business areas offering higher returns.15

In the financial crisis, Commerzbank was rescued by the German Federal Agency for Financial Market Stabilisaton (FSMA) in 2008. Over 10 billion euros were paid out to prevent the collapse of Commerzbank. The German Federal Republic with 15% is therefore the biggest non-institutional shareholder followed by BlackRock and Deutsche Bank with 5% each (Fig. 13). Since then, the operating profits have stabilized thanks to cost saving and lean process programs, and increased to 1.9 billion euros in 2015, which represents its highest post crisis value. Despite the recovery of Commerzbank in terms of operating profits, its performance at the German stock exchange has not followed the positive development of the DAX index (Fig. 14).

The strategic outlook for Commerzbank is clear. In a persistingly tough market environment, the private customer segment was able to acquire around 287,000 new customers, leading to a major increase in private banking operating profits of 65% from 455 million euros in 2014 to 752 million euros in 2015 (Fig. 15). The strategic realignment of the Private Customer business is a key element in the plan to boost earnings. The goal is to unite modern technologies with traditional values, such as fairness, trust and competence. This includes investments in Commerzbanks plat- form, its product and service offering, the advisory process and training employees in the Private Customer business to raise revenues per customer as well as the number of customers.16 Besides the Private Customers Segment, the strategy focuses on the Mittelstandsbank, which is the most profitable segment of the total operating profits at 38% (Fig. 16). The Mittelstandsbank will continue expanding its successful business model and leading market position. Growth will focus on the acquisition of new customers, particularly in the small and medium-sized corporate customers segment and on the expansion of business with existing customers in Germany.17

The run-off strategy for the new Asset and Capital Recovery Unit (ACR) segment will be rigorously pursued in the upcoming years. The aim is to still run off the remaining portfolios and residual risks completely over time in a way that preserves value and releases capital. Opportunities to sell assets and portfolios will therefore continue to be taken in cases where a sale makes economic sense. By the end of 2019, the ACR segment aims to further reduce the CRE and DSB portfolios substan- tially to below 5 billion euros. This represents a reduction of around 50% compared with the value of the portfolios at the time of the transfer, which was just under 10 billion euros.

Commerzbank intends to transfer a large part of the remaining assetsexclu- sively unimpaired assets with high internal ratingsto the Private Customers and Mittelstandsbank segments and to the Others and Consolidation division. The criteria for the transfer of assets are good credit quality, low volatility of income and the ability to integrate the assets into the refinancing and liquidity structure of the units concerned.18

(Case: UBSAcquisition of Commerzbank AG as a Possible Growth Strategy)

all the case you can find here (https://books.google.ie/books?id=N6BtDwAAQBAJ&pg=PA71&lpg=PA71&dq=Name+problems+the+banking+market+in+Europe+is+facing+and+evaluate+consequences+of+an+acquisition+of+Commerzbank+AG+for+the+UBS+Group.&source=bl&ots=H_R3mayFN3&sig=ACfU3U0wTgBdTNQAEyH09-PPCs0_LuqWIg&hl=en&sa=X&ved=2ahUKEwi8kNDx8YH0AhWLJcAKHUeVB7AQ6AF6BAgCEAM#v=onepage&q=Name%20problems%20the%20banking%20market%20in%20Europe%20is%20facing%20and%20evaluate%20consequences%20of%20an%20acquisition%20of%20Commerzbank%20AG%20for%20the%20UBS%20Group.&f=false)

QUESTION:

1. evaluate consequences of an acquisition of Commerzbank AG for the UBS Group. (answer with reference to the case and your own words)