March 12, 2018 / 4:56 AM / 9 months ago

Breakingviews - UBS stands to lose more than IPO fees in Hong Kong

A UBS advertisement is displayed on top of a commercial building in Hong Kong, China May 2, 2017. Picture taken May 2, 2017. REUTERS/Bobby Yip

HONG KONG (Reuters Breakingviews) - Old IPOs are bringing new problems for UBS. Hong Kong’s securities regulator intends to suspend the Swiss bank from sponsoring local market debuts for 18 months. Fees for such advisory work may be marginal, but preserving the wealth management brand with Asian entrepreneurs will be a challenge.

The Hong Kong Securities and Futures Commission holds initial public offering guides, known as sponsors, to higher standards. It has been investigating financial institutions, including UBS and Standard Chartered, for their work on share sales for months. Last year, it filed a lawsuit involving the 2009 listing of timber company China Forestry, although Reuters reported in October that the case had been dropped.

UBS intends to appeal this latest decision, revealed in its annual report on Friday. The revenue generated from making sure a company is suitable for flotation and discloses information properly is typically only six-figure work and pales compared to underwriting fees. At the same time, sponsors are more likely to get hired to sell new shares and assume the related risk. They also tend to have more power deciding which investors get to buy the equity. If the ban is upheld, it could mean UBS will have less to offer its rich customers.

Other banks are likely to end up in a similar position. The SFC has said it’s investigating potentially sloppy work by 15 firms in their roles as IPO sponsors. Even so, it’s an especially painful penalty for UBS, which depends heavily on its wealth management and private banking businesses. Rivals may start targeting the ultra-rich tycoons and up-and-coming founders on its client list. Defending its position and explaining itself into late 2019 will be distracting and draining for UBS.

What’s more, Hong Kong is gearing up for one of its best IPO years. The likes of  Xiaomi, Lufax and China Tower are among those heading toward public markets, as expectations also mount for Ant Financial, Meituan-Dianping and Toutiao to do the same. UBS can be an underwriter, but is bound to miss opportunities to forge the sorts of deeper ties that can lead to more work in the years ahead. In that sense, the Swiss timing couldn’t be worse.

Breakingviews

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