UBS could face shareholder rebellion

UBS has recently expanded in Singapore Keystone

The first signs of shareholder discontent at UBS have become evident after the bank wrote off more than SFr15 billion ($13 billion) in the subprime crisis this year.

Various Swiss-based groups have demanded answers ahead of a meeting in February 2008 where shareholders will be asked to approve an emergency SFr13-billion funding plan from Singapore and the Middle East.

Sustainable investment fund Ethos wants details of the bank’s risk management procedures and may demand an independent audit depending on the answers it receives at the extraordinary meeting. Ethos holds about SFr60 million of UBS stock – or 0.05 per cent.

Another institutional investor, the Swiss Social Security Compensation Fund, has openly criticised the favourable terms of the deal with the government of Singapore and an unnamed Middle East investor.

The fund’s head, Ulrich Grete, told the Financial Times newspaper that it represented an “asymmetric treatment to the disadvantage of existing shareholders”.

No shareholder group has so far called for an outright rejection of the funding plan that offers both investors a generous nine per cent return on their capital and a sizeable stake in the bank. UBS has admitted it does not need the funding to cover losses, but wants an injection of funds to repair confidence in the bank and to protect its wealth management business.

Singapore question

Professor Hans Geiger of Zurich University’s Swiss Banking Institute said a “No” vote would be “disastrous” and urged UBS to offer existing shareholders the same deal.

“Why should shareholders approve picking up the bill for a deal that is being offered just to the new investors? All shareholders should be treated the same,” he told swissinfo.

UBS has been present in Singapore for 30 years and has more than 2,000 staff stationed at one of the world’s fastest growing and most ambitious financial centres. Earlier this year it opened up a wealth management campus to provide training for 5,000 staff by 2010.

Singapore has based its revitalised financial centre on the Swiss model, attracting wealth management heavyweights like UBS to jostle for a slice of the pie in the prosperous region.

The proposed deal with the Government of Singapore Investment Corporation (GIC) would give the city-state a nine per cent stake in UBS in exchange for an SFr11-billion cash injection. Other banks may be asking if the competitive playing field remains level, according to Hans Geiger.

“On the one hand Singapore’s objectives may be purely economic and they could be acting just like a hedge fund, snapping up a good investment,” Geiger told swissinfo. “On the other hand, they have decided to back UBS and other banks may see themselves at a disadvantage.”

Questions to be answered

One such Swiss rival, Credit Suisse, refused to comment on the issue.

Swiss financial magazine Bilan also wondered aloud if it makes sense to give the Singapore government access to UBS sensitive information given the fact it has holdings in competitor banks in the region.

UBS would not be drawn on the issue or if it was confident that shareholders would approve the funding plan in February. However, the bank said it would answer questions posed by Ethos at the shareholders’ meeting.

swissinfo, Matthew Allen in Zurich

Key facts

UBS wrote off SFr4.2 billion ($3.64 billion) of bad investments in October resulting from the collapsed US subprime mortgage industry.
The bank then admitted to another SFr11.3 billion of write-offs in December while announcing the Sfr13 billion bail-out plan.
If the deal gets shareholder approval in February, UBS will join a growing list of international banking giants to receive state aid recently.
US banking group Citibank recently received a $7.5 billion capital injection by Abu Dhabi, the largest of the states making up the United Arab Emirates.
Morgan Stanley has also clinched a deal with the state-owned China Investment Corporation for an investment worth $5 billion.
Merrill Lynch is also reportedly trying to attract Singapore state funding via the government-owned Temasek investment house.

In brief

UBS was created in 1998 from the merger of Union Bank of Switzerland and the Swiss Bank Corporation. Five years later it adopted the single UBS brand for all its major businesses.

The group’s first major acquisition in 2000 was PaineWebber, the fourth-largest securities broker in the United States. This filled a strategic and regional gap in UBS’s wealth management business.

However, the acquisition of hedge funds Long Term Capital Management and Dillon Read Capital Management ended in disaster as both collapsed with crippling debts.

In July of this year, two months after Dillon Read went bust, chief executive Peter Wuffli abruptly departed without clear reasons. Following initial details of subprime losses in October, UBS announced 1,500 job cuts in its investment banking arm, including senior managers.