UBS Suspended From Sponsoring Hong Kong Offerings

UBS Suspended From Sponsoring Hong Kong Offerings

 
The Securities and Futures Commission (SFC) of Hong Kong has suspended UBS Group AG (NYSE: UBS) from sponsoring Hong Kong offerings for 18 months and also slapped a fine of HK$119 million ($15.20 million), following an investigation into the bank’s role in the listing of China Forestry Holdings Co., on the Hong Kong stock exchange. The fees generated from sponsoring IPOs is not a big amount as far as HSBC is concerned. However, as explained below, sponsorship roles usually pave way to highly profitable underwriting contracts. The ban imposed by the SFC would certainly affect revenues from underwriting business. Therefore, we are expecting the stock of UBS to decline in the near-term future.

To win clients, a decade before, many banks did not perform due diligence in a stringent manner. UBS was one among them. China Forestry Holdings Co., a logging company, went public in 2009 with UBS as the sponsor. The relaxed norms followed by UBS enabled China Forestry to get listed on the Hong Kong stock exchange. However, China Forestry collapsed soon after financial irregularities were found.

In 2016, UBS and Standard Chartered disclosed that they were facing regulatory action for the below par work done to get China Forestry listed on the Hong Kong stock exchange. In January 2017, the SFC filed a lawsuit against UBS for its role in the 2009 listing of China Forestry, but was withdrawn later. In October, the regulator, however, announced that it was investigating 15 such sponsors in the equity market.

Following these actions, Standard Chartered exited from a major portion of its equities business in 2015. Last year, Andrea Orcel, head of UBS global investment banking, said that the bank had stopped working as a sponsor to firms which are going public, as it is not worth the risk. Still, UBS knows that being a sponsor will easily lead to underwriting jobs, which have huge revenue generating potential. The SFC has not banned UBS from underwriting IPOs. However, the ban will certainly affect the bank indirectly.

UBS fell to 10th place in the list of top ten underwriters last year, with $581 million worth IPOs to its credit. In 2012, UBS was the leader in the IPO underwriters list. Last year, China Merchant bank topped the list with successful completion of $1.02 billion worth underwriting deals. Notably, Hong Kong is the third-largest market for IPOs, after the US and mainland China. Last year, deals worth $14.30 billion were completed, according to Dealogic data. UBS generated 32.5%, or $21.1 million, of its Asia-Pacific IPO revenues last year from listings in Hong Kong, according to Dealogic.

This year, Hong Kong expects to break its 2010 record of $57.8 billion worth listings. China’s mobile phone manufacturer Xiaomi Corp and Ant Financial, a subsidiary of Alibaba, are expected to go public this year. The regulator knows that most of the dirty games are played only when the market is red hot. Investors are usually concerned about returns rather than risk. Therefore, the SFC has started tightening its grip on regulations in order to protect investors’ interests.

Commenting on the ban, UBS said  “We are appealing, but even without the ability to sponsor, we continue to be able to underwrite IPOs in Hong Kong, which is the far larger part of our business.”

One thing is certain. The list of banks which are slapped with a fine is not going to end with UBS. However, as of now, investors will stay away from the UBS’ stock in the short-term.

Technically, the stock is moving along the declining channel as shown in the image below. Furthermore, the stochastic oscillator is in the bearish zone. Therefore, we are expecting a downtrend in the stock.

UBS - Technical Analysis - 13th March 2018

We may trade the downtrend by investing in a put option. While purchasing a put option contract from a binary broker, we will double check whether the expiry date falls on or around March 21. Furthermore, the stock of UBS should be trading near $18.50 in the NYSE.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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