Why UBS Is Threatening to Leave Switzerland

0:00This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed Sponsored Jobs. Get a$75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs. Hello and welcome back to The Market Maker. Now, if you think you've had a bad week, spare a thought for the hapless MSMD, Mohamed Atmani, who shared a sensitive document to clients outlining over 100 deals that the firm was working on, including some potential IPO targets in the likes of China, South Korea and India that the firm was monitoring or planning to pitch to.

0:54Our analyst Darius rightly suggested this was the investment banking equivalent of a fat finger resulting in lots of apologies from MS to private equity firms and other major clients. But Stephen, I've been dying to ask you, waiting for this episode to record, you did this very job that probably at a similar level to our friend here. Did you ever do a similar mistake when you're at HSBC. Yeah, I don't think I was ever quite at the head of Fig Asia MD level that our friend Atmani is. But look, it is the scariest thing in the world, especially when you're a junior banker. You double, you triple, you quadruple check, everything.

1:40And the last thing you want to do is, as Darius says, is a fat finger where you click send and get it all a bit wrong. And my only equivalent, which is, which pales into comparison with our friend Atmani, is I remember when I was maybe 12 months on the job and, you know, really earnest kind of prefect style young banker trying to do all the right things, but also trying to be cool and get on with my junior analyst colleagues. I remember the new group of interns, they all got invited out, I think it was like week six, they all got invited out to a go-karting evening. I remember this very, very well.

2:21And me and the other analysts who were slaving away working very late evenings were really, really upset. So I send this like, why aren't we invited blah, blah, blah email to thinking that I was sending it just to all the other analysts and would get a bit of a laugh and be you know why aren't we invited to the to the go-karting on a Thursday evening instead we're just working but obviously I accidentally sent it to the head of the internship the program manager the HR people and I had to kind of go upstairs groveling and say whoops sorry my bad but also can we go go-karting well go-karting maybe maybe we can have a market maker championship at the local uh east london go-karting uh center but uh yeah i mean it makes obviously i was on whilst you were on that side of the bank i would have been on more the market side and it can't get worse than saying to 50 000 people in real time on a microphone that the bank of england have hiked 100 basis points after they hike 25 uh yeah that was uh oh my god into self-deprecation than there.

3:35Yeah, I've been to some dark places. Yeah, that's a shocker. That is an absolute shocker. I assume you can put that down to not enough sleep and maybe a few too many rough nights. Yeah, yeah. It took a while to go over that one. But here I am still standing, just about. So back to what we're going to talk about today and going old school and new school. So taking a look at two banks that you've probably heard of, UBS, the storied Swiss bank, which can trace its heritage back to 1862 and the upstart British bank Monzo, who only just celebrated its 10th birthday. Quite incredible, the difference in those two.

4:14So hopefully it's an important episode for anyone wanting to learn a little bit more about how banks really work, how heavily they are regulated, and how changes in regulation can have significant strategic and financial implications. So hopefully this would be a good episode if you're about to start to enter interview and assessment centre the season, which I know is fully underway at the moment. So Stephen, where do you want to begin? Yeah, well, I definitely want to begin with the UBS story, but you're absolutely right. I think one of the biggest mistakes I made, certainly when I was interviewing, but also in the early part of my career, I didn't really know the business model of a bank.

4:51I didn't really know how banks worked. I didn't really know what the strategic drivers and the regulatory constraints were that bounded the ambitions of some of the people that I was working with. So almost, I mean, you don't go into, I don't know, a job interview at Google without knowing really how Google works or the business model of Google. So let's use UBS and this really interesting headline as a bit of a primer to just get a bit of background on what some of these constraints are that limit the ability for banks to kind of go gangbusters and go gung-ho in their lending and things like that.

5:34So the headline, which is a really interesting one to drop, you must have seen it last week, UBS considers exit from Switzerland due to higher capital requirements. Is there anything more Swiss than UBS? It would be like if Roger Federer was going to get a green card. He probably does. He's probably got one. He probably does have one. He's probably paid for one, right? He's probably got one of those special Trump, the gold card. Oh, absolutely. No, but this is, you know, what could be more Swiss than UBS? I was thinking to myself, obviously, Watchers, that's pretty Swiss. Army Knives, pretty Swiss.

6:15And then I thought to myself, Toblerone, which is one of my all-time favourite chocolates. But obviously, that is no longer Swiss, it's owned by the US Mondelez, big conglomerate, and it moved production to Slovakia so it can no longer use the Matterhorn. This came out a couple of years ago. It can no longer use the Matterhorn on its advertising. So maybe UBS will move from Switzerland a little bit like Toblerone did. I love, this is the benefit probably of all those books behind you, which everyone always asks me about whenever I meet someone who listens to this podcast. So there's probably a book there talking about the Matterhorn and the history of chocolate bars by Stephen Barnett.

7:02Yeah, I wish it was that sophisticated. But no, this part of this episode, and not wanting for a lot of people to stop listening now, this part of this episode is not about Toblerones. It's focused more on a thing called the common equity tier one capital requirement. Yes, that sounds boring, but I'm going to try and make it interesting. Yeah, I was going to say, if you can make tier one common equity, or common equity tier one, or CET1s interesting, I will buy you one of those big, fat, monster airport Toblerones next time I see. You're on. You're on. Okay. So remember the headline, UBS considers exit from Switzerland HQ due to higher capital requirements.

7:51So I want to really set the scene so that we get a good understanding of this really important concept and number across every bank. Every bank has one. So let's do a little bit of a history lesson. So common equity tier one. It's actually not a particularly old concept, Basel I or Barl I in 1988, so what, 40 odd years ago, required banks to hold total capital. And when we talk about capital, we talk about equity. So shareholders, as equity, retained earnings, etc. of at least 8 % of a bank's risk-weighted assets. And remember, for banks, assets are loans. For normal companies, loans are liabilities.

8:48But they are the thing that banks make revenue off of. So back in 1988, Basel won 8 % of all of the risk-weighted assets, all of the loan book adjusted by risk, 8 % banks had to hold as equity. And if you think about this, we're going to fast forward maybe to 2008 in a second, the way that I always like to think about this and tend to teach it is it's a little bit like having a mortgage, right? So if you have a mortgage, let's say you have a 90 % deposit, 90 % loan and 10 % deposit, your loan to value is 90 % and that 10 % of equity that you're putting in is your buffer. If things start to go south with your loan book or if things start to go south in the economy and borrowers start defaulting on their debt, you have that 10 % buffer, right?

9:55So fast forward to 2008. This is obviously where a lot of the major banks got well over their skis kind of due to the impotence and the toothless nature of Basel I. So in 2001, banks were using their own methodologies to determine the riskiness of assets, right? And actually, for a very long time, they weren't even including trading activities as part of risk-weighted assets. So they were basically marking their own homework. And also this concept of capital was split between tier one. Again, we'll talk about that a lot in this episode. Tier one, which is your core shareholders equity, your retained earnings, et cetera.

10:51And then what they call tier two, supplementary capital. And this supplementary capital with things like convertible notes, convertible debt, things that didn't quite hold the same buffer strength as pure equity. So this combination of having a dodgy capital base, 8 % of risk-weighted assets that were self-marked, basically was the cause of the global financial crisis. This is why Lehman went down. This is why RBS went down. This is why banks had to get bailed out. because the regulatory framework was so weak and these banks were lending so much relative to their buffer, to that equity portion, that as soon as a few of that loan book started to go south and there were delinquencies and defaults, the equity buffer got absorbed extraordinarily quickly and these banks needed to be bailed out, right?

11:54So fast forward to 2010. Basel III. And anyone that's been in finance, knocked around finance for a bit of time, knows a heck of a lot about Basel III. This introduced the concept of the common equity tier one ratio. So this is basically your shareholders' equity, your retained earnings, your shareholder returns, the core equity. And it basically said that any bank worth its salt or any bank operating in a global environment needs to have a common equity tier one ratio of at least 7%. But there were also surcharges for what they called GSIBs, globally systematically important banks, right? The likes of UBS, the likes of Morgan Stanley, the likes of Barclays, meaning that the average global bank that we talk about every week had to hold about anywhere between 10, maybe to 12 % of core equity, common equity tier one capital relative to a much more tightly defined risk-weighted assets.

13:08So that is where we're at as we fast forward, maybe closer to the present day. Yeah, because I remember at the time, I'm trying to recall what year it would have been. But there was a point of time a few years after the global financial crisis when Deutsche Bank was in the crosshairs at one point. I think their share price had dropped at the time. I think it was under 10 euros or so. And then it was, is this bank too big to fail? Systemically important to the functioning of the system. They used to have these infographics with Deutsche in the middle. And it was like tentacles that were loaning money to other banks and making the system function.

13:49And yeah, just with that then, looking at Basel III, I'm assuming there's a qualification factor to be determined to be a systemically important financial institution. Yeah, I mean, it's got to be of an appropriate size and integration within a particular economy or set of economies such that, as we've mentioned, this concept of too big to fail. this is what's so important about banks right is banks aren't like companies even though they have market capitalizations and we can invest in banks like we can invest in we can invest in a listed bank like we can invest in a listed company and they both have tickers they're very very different things if a bank like deutsche bank with a market capitalization of whatever it is now not very much unfortunately went bust that would have orders of magnitude more impact on the german and global economy than an equivalent sized corporation going bust so these big banks even if they're not top tier bulge bracket whatever you might want to call it these big banks are too big to fail because they are and this is what makes it so interesting we've discussed this on the pod a number of times they are almost quasi utilities and their relationship with governments and the national interest and national champions is such that these things really really can't afford to go bust and we saw the effects of a couple of them a few of them going bust back in 2008 and my gosh, it was horrible.

15:34To make your point, I was just having a quick look. What is the relative size difference between Volkswagen and Deutsche Bank? And they're kind of the same in terms of actual value. I mean, I've just literally checked this on Gemini, so it hasn't been fact checked, but that would make sense. But like you said, completely different order of magnitude in terms of the importance to the system. Absolutely. Absolutely. So let's get back to UBS. So what is UBS's current common equity tier one ratio requirement at the moment? 4.5 % is the Basel III floor. Then they have 5.5 % in addition, which is what's called the buffer capital.

16:20So that's the 2.5 % buffer plus an addition because of its status as a globally significant bank or systemically important bank. Even more so post-credit Swiss, right? There's also a 0.46 % counter-cyclical buffer. So it's around 10.5%. It's actually a little bit higher because it's based in Switzerland and we'll get on and talk about that. so that is the common equity tier one requirement that UBS needs to hit from a regulatory perspective that's the amount of equity it needs relative to the risk-waisted assets that it's got on its books now currently UBS has got a CET1 of closer to 15 % and it's maintained a policy of having significant headroom above that regulated floor of CET1 requirements.

17:17So it's already up at 14-15%. It could end up getting a lot higher. Yeah, I'm interpreting your tone here. And it sounds like the inference is that a CET1 is bad. So yeah, why would that be the case? Yeah, it's one of these things. Again, it's like any metric or any risk regulation. It is good until it becomes bad. Let me explain that. So having regulation to mandate that banks have appropriate levels of equity in order to protect them against big global shocks is a good thing. And banks have been much more stable. All of the stress testing over the last 10, 15 years suggests that these banks are the biggest banks in the world are really, really well capitalized and can survive some pretty big macroeconomic global shocks.

18:21So having a high CET1, common equity tier one, is good because it makes the banks safer. Mandating that a bank in a particular country has a much higher CET1 requirement than maybe banks in different countries might not be so good. Because remember, equity is expensive, right? as a form of capital. Two ways to fund a bank, equity and debt. The more equity you have to raise, the more common equity tier one you have to have, like lying there in order to do all of your lending, the more expensive it is and the lower potentially, well, the lower your return on equity is because you need more equity relative to a consistent level of returns.

19:19So it, may make you look and it may be that you are less profitable from a return on equity perspective than equivalent banks in countries that don't have as high CET1 ratios. And remember, by the way, that this common equity tier one, like this needs to be at a minimum of 10, 11, 12 % at the moment. right? You can't just do a load of share buybacks or issue a load of dividends because that might drop you below that threshold. You actually can't do it from a regulatory perspective. So if I'm an investor in UBS, or I've got the choice of being an investor in UBS or Morgan Stanley and UBS, all right, they've got to hold more common equity tier one, which means return on equity is probably going to be lower.

20:19Cost of capital is going to be higher because you're funding more of your business with equity relative to debt, which is obviously tax advantaged as well. And there is a bigger amount that you need to keep before you can start issuing dividends and share repurchases. Suddenly the story of UBS or the story of a bank with a high CET1 requirement starts to look less favourable than one with a lower CET1 requirement. So going back to the headline of the story then, given everything UBS are threatening to leave, let's just pack up shop and go somewhere else then. So what specifically is it? We haven't really said yet.

21:01What is the government demanding that they do then that's getting them to make such noises of that magnitude okay so this is a law that's currently in the process of being debated going to the upper tier chambers lower tier chambers etc and the law in question is that UBS should back up or finance the capital requirements of its foreign units It's foreign subsidiaries with 90 % of common tier one equity capital. So obviously your ordinary shares, your retained earnings, your equity reserves. This basically means UBS owns a lot of foreign subsidiaries, right? And UBS America Holdings LLC is by far the largest.

21:54It's quite hard to get numbers on the equity value of this subsidiary, but I had it at 27 billion of equity in March 2025. That might be a lot more, or actually might be a little bit less due to the Credit Suisse integration. Might be more liabilities, so it might have gone down. But anyway, a big number. Under the Swiss government's proposal, previously UBS had to hold 60 % of CET common equity tier one capital against their equity in foreign subsidiaries so 60 % CET1 against the 27 billion of UBS America holdings under the new proposed legislation this rises to 90 % right and actually it was mooted it was tabled that this was going to be as much as 100%.

22:49So just for the US subsidiary, the extra capital needed would be in the range of about$10 billion, right? Estimates suggest that this move by the Swiss government, by parliament, to go from 60 % up to 90 % in CET1 for foreign subsidiary equity, this is going to add between$15 and$18 billion of common equity tier one requirements. Basically overnight, moving UBS's CET1 ratio from about 14.5%, which it is now, to closer to 17.5%. So let's think about that in the context of international competitiveness. I've just mentioned the fact that CET1 is good until it is bad. It is good because it makes the bank safer, but there is a point where regulation stifles competitiveness.

23:57It's actually something that Jamie Dimon's been speaking about a lot over the last couple of years. Have we got to the point that banks are now overly risk averse, overly regulated? And to get to a stage where UBS's CET1 is upwards of 17 % may well suggest that it's going to lose international competitiveness. Yeah, I mean, on that front, I was going to ask, how does that work in practice? Like the relationship, given what happened with Credit Suisse, I thought the whole idea here was that UBS did a good thing, stepping in, swoop it up, let's stop a catastrophe, integrate it. I guess what political change in the years that have followed, I would have thought that there is no, is it the, I guess what I'm trying to say is the politicians thinking like, this is a national interest and there is no competition.

24:59We don't really care about the American banks, the UK banks or whoever it is. We only care about there's one bank, it's you and therefore you need to be buffered. Whereas the shareholders simply are going, no, this is too onerous. We don't have the flexibility. We can't compete on an international level. Is that the simplistic way of looking at it? I think it's absolutely the right way of looking at it. There are two probably big things to talk about as to why the Swiss government, Swiss parliament are getting involved in this. This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense.

25:39Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed Sponsored Jobs. Get a$75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs. Firstly, credit stories, right? So Credit Suisse, to anyone that knows the storied history of Credit Suisse and knows their bank history, that collapse a few years ago back in 2023 was absolutely staggering. Obviously, it had been limping along for quite some time, but this is one of the apex predators of the investment banking world, right?

26:24And the logic to moving from that 60 % CAFTA requirement to 90 % for foreign subsidiaries is that 60 % wasn't enough to stop Credit Suisse from imploding. And remember, Credit Suisse had such a massive US presence. It's almost bigger in the US than it was in Europe. So there's a little bit of like, all right, we need to learn from our mistakes. we have gone from a country with a banking system that had two big beasts to one with one big beast. And that's because our regulation wasn't appropriate. Now, then we move on to point two. UBS's balance sheet, about$1.6 trillion, is well over one and a half times the size of Switzerland's entire economy, right?

27:18So when you think, all right, if I'm a Swiss politician, or if I'm a consultant spending some time with the cabinet, I don't know how Swiss politics works, with the cabinet, and they're going, all right, what are the biggest existential threats to the security and stability of our country? You know, you have all the generic ones, the AI ones, the supply chain ones, whatever it might be. But one of the big ones is, all right, if UBS goes belly up, our country is totally reliant on this bank. It's got a balance sheet one and a half times the size of our entire economy. So unlike a Morgan Stanley or a JP Morgan, I mean, these banks are too big to fail, but they're at least within a much larger economy.

28:10This is such a structurally important organization that it basically is quasi-governmental, right? Like UBS cannot fail and it needs every safety, surety, regulatory net and guardrail to make sure that UBS doesn't do a Credit Suisse, right? So that is why these proposals are being mooted. the lessons learned from Credit Suisse and then just the sheer size of UBS. So what are UBS saying then? So what's their response? I mean, they've made this quite threatening statement about leaving, but what about its shareholders? Yeah. So CEO of UBS, Sergio Hermotti, he says, we can live with a black eye, But two black eyes and a broken nose is too much.

29:04Yet that's exactly what the demand for capital backing of either 90 % or 100 % comes down to. They proposed something that was much more, I think it was something like 50 % tier one and maybe 50 % supplementary tier as we've discussed previously. So they are in no uncertain terms, pissed off. And by the way, you know how these things work. They'll all be, I don't know if they, is there a big sauna culture in Switzerland? For some reason, I imagine there is, maybe there's not. They'll all be in the sauna together, right? The politicians and the senior bankers. And the vibe in the sauna, I don't know, I wouldn't want to be there, to be honest.

29:48I think it'd be quite negative. The vibe in the sauna. Sauna vibes, yeah. Sauna vibes. You don't want to be in between Sergio Amati and a senior cabinet minister. But anyway, look, they're pissed off. They're saying, look, this is going to completely hamstring our global competitiveness. You are making life extraordinarily difficult for us to run, to compete. and then they're getting a lot of they're getting a lot of noise from their shareholders ubs's shareholders so artisan partners who owns 1.8 percent of ubs is the is the main clarion call for relocation so it's actually come out and said look you know you guys have got to go to the us you like we're an investor in in in ubs and we don't think we can be anymore because you're not going to become as profitable on a return on equity perspective, on a price to book value perspective as the share price starts to labor a little bit.

30:55Unless you move to the US, you are no longer an attractive investment opportunity. And therefore, we're going to bang the drum and say, this is shocking, move to the US. Is there any strategic way to change the composition of the business to kind of accounting fix the CET1 ratio whereby you mentioned a lot of American banks that might be highly geared in more riskier activities where you might be more in wealth management of funds for example or whatever it might be is there a way that they could engineer it to pacify some of the concerns and then have reason to have a lower number yeah it's a very interesting point.

31:39I'm sure that this is being discussed. If you've got this 90 % common equity tier one requirement for all foreign subsidiaries, why have a load of foreign subsidiaries? To what extent is having UBS, America's LLC now the right decision? Instead of moving to the US, do we pull out of the US? But again, if you're a global bank, you need a US presence. And the US part of the US division of lots of different banks is their most profitable division, especially for a bank like UBS that, as you rightly said, makes a lot of money from wealth management and things like that, which is a lot of wealthy people in the States.

32:27So yeah, Yeah, discussions will be happening, but maybe there will be a call to get out of maybe slightly less profitable foreign subsidiaries. Probably not, Matt. Okay. Well, at the moment then, what I'm curious is we've talked about competitiveness, but we've not actually had, like, what's the context here? So what would be some familiar institutions that people listening would be aware of? And where are they at on this scale as compared to where UBS is or could be? Yeah, so at the moment, I'm going to give you minimum CET1 ratio requirements for some of its rivals. So the absolute floor that other banks need to hit, remember, UBS at the moment is around 11 % and it will probably go up if this bill gets passed.

33:20Barclays is up at 12.2%, CET1 requirement. Morgan Stanley, 11.8%. Citigroup, 11.6%. JPMorgan, 11.5%. So at the moment, you're all fighting in roughly the same domain, right? And their actual real CET1 ratios, not the regulatory requirement as of earlier on this year. Morgan Stanley's was up at 14.8%, Barclays 14.3%, HSBC just over 14%, JP Morgan just over 14%. So this is like across different jurisdictions at the moment, the CET1 requirements are roughly the same and banks are treating it in roughly the same way, holding between basically 13 % to 15 % common equity tier one. Obviously, if UBS jumps up to what I mentioned earlier, somewhere closer to 17%, 17.5%, that starts to become material drag on the return on equity that they can achieve.

34:32My feeling so far is that this is just a natural course of negotiation that seems to be happening here and you start here and it's like the classic maneuvering to get to some compromise because both sides need each other sort of thing so i guess this this segment comes down to is ubs gonna leave like what are what's the odds or chance of that actually happening as per the ft or whomever will try and pump as a headline. Yeah, I mean, it's not going to leave, right? We might have spent 30 minutes on this episode teeing up a headline. UBS, they're not going to leave Switzerland. There's absolutely no way that this is going to happen, despite investor agitations.

35:18It is two peas in a pod. The bank and the country and the government, they're all in it together, right? So you're absolutely right. And it's been going on for a couple of years, by the way. This is not a totally new story. This back and forth between what UBS wants in terms of a slightly more lenient CET1 requirement for foreign subsidiaries and what is being proposed. Again, I would say that there's probably a round or two of compromise or narrowing of that gap between the two sides in order for both sides to say, you know, we're not completely unhappy about this. But let's just bear in mind, I just want to kind of end this segment with just a little bit of context about just how well UBS has done out of Switzerland over the last few years.

36:15Because remember, in 2023, when Credit Swiss went bust, UBS obviously came in as the white knight, but my gosh, they picked up Credit Swiss on the absolute cheap, right? For a couple of billion, three billion euros or something, or Swiss francs. And as part of that deal, the Swiss government guaranteed 10 odd billion of loan losses, right? And I was just looking at the share price of UBS. And since the announcement of UBS soaking up Credit Suisse in March 2023, the share price has almost tripled. It's gone from 17 Swiss francs to close to 40 Swiss francs, right? It's gone up by two and a half times.

37:01So I would be like, look, you know what? Let's roll with the punches. We've had an unbelievable win. We are the last player in town. We've soaked up Credit Suisse. our share price has more than doubled in the last three years, partly due to the Swiss government doing everything they can to make the deal work. Maybe it's time to take a little bit of a hit to stay on the right side of this government that's helped us out. Maybe they won't be thinking like that. Maybe just one thing to finish then. You said that there's a bill that's being heard in parliament at the moment. So what's the timing of that yeah so this 90 proposal which was passed in the first chamber um so this goes down to the lower house apartment uh where there are three potential outcomes they can vote in favor the bill goes through 90 cet wrong requirements for uh foreign subsidiaries sounds boring isn't as boring as that secondly they can reject the bill in favor of an amendment working with the upper house for a compromise, maybe getting that CET1 requirement to 70 % to 80 % or they can reject the bill outright and they reject the bill and then the bill dies and we kind of keep going as is with a 60 % CET1 requirement.

38:26So we will see this story rumbling on, probably not on the front pages of financial news, because the likelihood of them actually moving to the US is very low. But it does give us a really good opportunity to talk about some of the more technical aspects of banks and funding and things like that. Okay, I'm going to let the audience decide whether you deserve a Toblerone or not. We'll leave it to them to decide whether yes or no, whether you've earned making CET1 ratios. interesting enough and also I've got there's a small human staring at me through my glass wall at the moment slightly off putting my daughter's just got back from school and I'm going to try my best to maintain a serious face and full concentration while she's pulling faces at me at an angle right there so look let's move it on let's talk more you know the challenger banks and let's just bring it forward to the 21st century and talk about Nubank in talks to buy Monzo for 8 to 10 billion.

39:33And I know in your notes that Darius, our researcher, does such a thorough job that whilst he was deep in this, there was an update. Nubank walked away. The deal is now dead. But nonetheless, it would be great to understand a little bit more about these banks, parallels, differences, and also what could happen next. Yeah, absolutely. So the headline is always classic when you prepare for a story and then it changes the day that you're going to do the podcast. But the headline is, was that Nubank, the South American challenger bank, you'd probably call it, but relatively large, $66 billion market cap listed under the NU ticker on the New York Stock Exchange.

40:21It was in early talks as of last week to acquire the UK challenger bank Monzo, which has 16 million customers and some very brightly colored cards, credit cards and cash cards. So this was just one of the options that Monzo was exploring. Basically, Monzo raised a bunch of money. I think its last valuation was maybe at$5.4 billion back in October 2024. And it needs to do something strategically because it's getting left behind by the likes of Revolut. And we'll talk about the comparison between the two in a second. but as a challenger bank your goal is to keep on growing you know velocity and speed of growth is everything it's not all about it's not about profitability at this stage for monzo it's only 10 years old in the context of of a ubs that's 160 years old but you know they need to continually either raise money or seek strategic options in order to grow at the pace that gets them to the scale that they need to turn a profit and reach those economies of scale that you can have in the world of banks.

41:41So it was assessing its options. Its advisors, Morgan Stanley and Catalyst, were sitting down with them and going, hey, look, you basically got three options. One, maybe even four options. You got one IPO. And that was kind of taken off the table last year. There was a little bit of internal back and forth with the CEO and there's some stuff going on there. That was kind of taken off the table, a UK or US IPO. Option number two, continue to raise more money from venture, but the check sizes might well be a little bit smaller, especially here in the UK and Europe. And Monza doesn't have the word AI in it.

42:20So VC is not quite as interested as it was. Option number three was sell a minority stake to private equity. And option number four was to sell the whole thing. And this was option number four, this potential sale to Nubank. Now, obviously, the news was updated. Nubank, whose shares dropped 10 % on this announcement, it wasn't an announcement, on the kind of rumor mill, shares dropped 10%. Invest was not happy with this strategic move, this potential strategic move by Nubank. So Nubank walked away, leaving Monzo with basically just one option left if they are going to keep on getting funded and keep on growing, which is go down the private equity route.

43:11So just so I'm right here, it was reported that they were going to go into talks. So was this like a little litmus test? How's it going to be taken rather than they were going for it and then they saw the reaction and reverse course? Yeah, I think you're right. I think it was something, it was a very speculative conversation anyway, right? It doesn't necessarily, Nubank, South American Bank, Challenger Bank, not really focused on Europe. This is a speculative conversation. And yes, maybe if this news got leaked and shareholders reacted less negatively or maybe even positively, then we might see conversations progressing.

43:55But my gosh, like Nubank's shareholders, obviously, you don't want dilution. This would be a part share deal. So Nubank would have to issue new shares to acquire Monzo. That's not great from a shareholder perspective. The price that was mooted or slated was eight to 10 billion pounds for Monzo, which is double the 4.5 billion pound valuation from the 2024 secondary share sale. Yeah. And Nubank's been focusing, well, it's been growing organically, super important. So it hasn't been doing a lot of inorganic growth through acquisition, but it's been focusing on the US and North America and getting a US banking license and trying to figure out how to compete in what is the most complex banking market in the world.

44:49So why go and buy Monzo when you've got all of this other stuff going on? You just mentioned there, like inorganic, organic. What are you talking about there in this context? Yes, I always use banks as a really good example of one of the reasons why you might want to acquire another business or another bank. So two types of growth. You can grow organically, which is reinvesting your profits, which is investing the capital that you raise in order to build out the business that you have and enter new markets slowly, surely growing organically. Then you have inorganic growth, which is growth through acquisition or joint venture, going from one rung on the ladder to the next rung overnight, right?

45:41Obviously, there are significant challenges to leaping from one rung to the other, and it costs a great deal of money. But one of the But one of the main reasons why you might want to pursue an inorganic growth strategy as a bank is to acquire banking licenses. Sorry, I remember HSBC, who I used to work for. They went through this unbelievable expansion plan in the 90s where they wanted to be the world's local bank. They wanted to be in every single country. And if you've got this expansion plan, if you want to grow and you want to have a banking presence in lots of different countries, which has benefits from a trade finance perspective, from a deposit-based perspective, and also from a retail wealth management perspective as well.

46:38I've got lots of different opportunities to go to my local branch. You're not going to do that organically because the time it's going to take to secure a UK banking license, a German banking license, a Mexican banking license, whatever it might be, by the time you've done all that, the CEO will certainly no longer be the same CEO. So banks tend to acquire other banks in order, one of the biggest assets for Monzo is its UK banking license, which gets it the ability to get deposits from customers and to make loans. So that is like the core strategic rationale for any bank buying another bank. Did it make sense in the context of Nubank and Monzo?

47:27Probably not. Maybe then is a good opportunity for a teach-in point about the difference of the business models of say fintech against your incumbent like mature big beasts like UBS who as you said is like more closer to 200 years than 10 years that we've got for Monzo here so fundamentally what is the difference of the business model of Nubank against like a Lloyd's banking group for example yeah i think i think it's all about the platform isn't it so these these challenger banks monzo revolute etc they were actually monzo and revolute both founded in 2015 and they were founded in the in the app age right their infrastructure is purely digital is almost entirely digital, excuse me, and you get to build the tech stack, the rails from scratch from 2015 onwards, right?

48:32Whereas if I am HSBC and I'm trying to react, I've got this big, extraordinarily expensive cost base and real slow moving bureaucracy to try and do anything from a technological perspective and from a customer-facing efficiency and user experience perspective. So it's just, it's the classic case of incumbent. What does the incumbent have? Well, HSBC, UBS, huge, huge deposit bases, which is the bread and butter of banks, but also extreme reputation extremely strong global reputation and very very embedded links within industries and within different customer bases versus Revolut and Monzo which has got none of that right but what it does have is speed of movement you know quality of user experience cost of products because you can make things cheaper if you do it on newer and more efficient rails.

49:43And therefore, you've got this kind of, all right, do I go for the devil I know, the HSBC, or do I give this Revolut thing a chance? It doesn't have the same trust level, doesn't necessarily have the same reputation, but it is doing things really intuitively and it's acting for the modern customer and the modern business. Does this not lead then to a natural pathway to consolidation of the challenger banks? They can't be bought because they can't be plugged in by the big incumbents. So then is it just survival of the fittest and whoever's the biggest just gobbles up ultimately all the other fintechs because they all need to satisfy their own VCs or funding to grow so aggressively?

50:31It's a very interesting question. And I think if you had raised that thought five or six years ago, that Revolut, let's use them as the biggest beast here, might acquire Monzo, you'd be laughed out of the room. Because they were both on a similar trajectory from a challenger bank perspective. they both founded in 2015 both grown very very quickly but they pursued different strategies to the extent that Revolut and as we covered a couple of months ago is absolutely flying right valued at 75 billion dollars in the secondary share sale um close to a year ago whereas Monzo had a down round, which means that it was valued at less than the previous round in 2021, I think, 2022, because of a failed push into the US.

51:31There's been lots of comings and goings with CEOs being ousted and all sorts of strategic missteps. So you almost look at these two challenger banks that were founded at exactly the same time, one going in one direction, Revolut to the moon, because quite frankly, they've got it right from the products that they've launched, from the aggressiveness and the aggressive nature of their growth strategy from going international, but in smaller markets quicker versus Monzo that went straight in for the banking license model, then tried to break the US, which is obviously an extremely tough nut to crack.

52:09And then you've got a company that's valued at$75 billion Revolut and a bank that's valued at$75 billion versus a bank that's valued, well, at£4.5 billion as of the last secondary share sale in 2024. So could there be a consolidation? Could there be a Revolut acquiring Monzo? And by the way, Monzo is still growing at 35 % a year. It's profitable. it's uh it's got 16 million customers you know in again so much of banking is about scale adding 16 million customers adding that deposit base is pretty attractive so i don't know and you could you might have a little career in investment banking i'm not sure it's a story as old as time trying to break the u.s isn't it it's like uh they'll come to the realization like oasis back in the initial heyday back in the mid-90s.

53:09Just not worth it. It's a tempting market to take on. Just like take that. It's not worth it. I like how you referenced Oasis and take that not the Beatles and Led Zeppelin. I'm showing you what generation I'm in. There we go. Okay, so to conclude then, what's the final outcome here for Monzo in your opinion? It's likely that they will raise a load of money from a private equity fund, maybe an Advent, which is a European private equity firm, a minority stake, 15%, something like that, to keep the growth engine going. I think there is an acceptance that the trajectory after the bunch of missteps is certainly not the same as Revolut, but there might well be space in certainly the UK and in Europe as well for more than just Revolut to be the only challenger bank.

54:05Obviously, we've got others like Starling and things like that. So it's likely minority investment from a private equity firm, not the big acquisition from Nubank. All right, cool. Well, time will tell both on that front and whether the law gets passed in Swiss parliament in due course. What I've done is I've given you two headlines that are never going to happen, right? I've given you UBS moving to the US, which isn't going to happen. Then I've given you Monzo being acquired by Nubank, which is not going to happen. So in conclusion, nothing's going to happen. They were two headlines being pumped quite hard in the financial media, that they were going to happen as far as they were concerned.

54:42So there you go. There we go. What's the real news? All right, cool. Well, look, thank you very much, Stephen. Fascinating as always. And thank you for that breakdown of the CET1 ratios. I'm sure there might be some questions. So if I could kindly ask you to keep an eye on the comment section, as I'm sure it will be populating with lots of queries and questions. And we're more than happy to take them. So please do. All right. Thanks very much, everyone, for listening. Thanks, Stephen. See you next week. Brussels clean up nicely at Sweetgreen. Maple glazed, roasted, and edges perfectly caramelized.

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