UBS takes knife to scandal-hit investment bank

Ermotti (foreground) and Villiger ponder the future AFP

Swiss banking giant UBS will dramatically cut back its investment bank following a rogue trading scandal and the continued prospect of stringent new regulations.

The bank has announced 400 extra job cuts while pledging to slash risky assets by half and exit loss-making businesses. UBS is to place more emphasis on its “core DNA” of wealth management, says chief executive Sergio Ermotti.

Thursday’s announcement, made in New York at UBS’s annual investor day strategy conference, came as no surprise to the markets. Investment banking excesses inflicted $50 billion (SFr46 billion) of losses as a consequence of the sub-prime mortgage meltdown and the division was recently hit by a SFr1.85 billion rogue trading fiasco.

At the same time, Swiss regulators are demanding that banks set aside more capital as insurance against risky trades than dictated by the international standard. This would make investment banking an even less attractive proposition, tying up more money in the unprofitable business of covering trades in case they go bad.

“The challenges our industry is facing are daunting,” under-fire UBS investment bank chief Carsten Kengeter told the conference.

League tables out

In the face of such negative headwinds, UBS has given up once and for all on its previous ill-fated mission to be one of the world’s leading investment banks. Ermotti told investors that UBS would no longer be distracted by “league table status”.

Investment banking division staff – based mainly in New York and London – will be reduced from 18,000 to 16,000 by the end of 2016. UBS had announced most of these cuts in the summer as part of a group wide 3,500 job reduction plan, but Thursday’s announcement added another 400 to the figure.

Risky assets will be reduced from the current level of SFr300 billion ($326 billion) to SFr155 billion, also by the end of 2016.

The investment banking departments that deal in such trades will either be shut down completely or drastically reduced in size.

In a statement issued by the bank Ermotti summed up the new strategy as “adapting our strategy to deliver more attractive returns to shareholders and to reflect economic and regulatory change”.

“We have chosen to substantially reduce the risk profile of the bank by exiting and downsizing businesses which are not value added to our client franchise or deliver unattractive risk-adjusted returns,” he added.

New kid on block

The new CEO has only this week been given a permanent mandate to run the bank, having filled the role in an interim basis since September when Oswald Grübel stepped down in the wake of the rogue trading scandal.

Ermotti, a Swiss citizen, was keen to dispel the conception that UBS had been taken over by an aggressive United States ethos, telling investors that the bank was a “Swiss company” with strong Swiss roots.

The new strategy will free up funds to “extend our leadership” in UBS’s core business of wealth management, he said. The bank has only recently recovered enough of its reputation to persuade the world’s wealthy to reverse a trend of pulling their assets out of UBS.

Much of the asset flight was caused by a damaging legal action in the United states that saw Swiss banking secrecy eroded and data on nearly 4,500 UBS clients turned over to the US tax authorities.

Some SFr12 billion to SFr30 billion of assets could soon be lost as a result of other tax evasion probes around the world, according to UBS head of wealth management Jürg Zeltner. But the bank’s wealth management division still boasts a world beating SFr1.4 trillion of assets under management.

Battle of rivals

Hundreds of new client advisors would be hired in the coming years to take advantage of growth in the sector, especially in the Asia-Pacific region, the bank said.

UBS’s restructuring plans mirror many of the changes also taking place at Credit Suisse.

The rival bank has also announced plans to shed some 3,500 positions – many of them in its investment banking division, that will also halve the level of risky assets it has on its trading books.

UBS won the most recent round in the battle of rivals, posting SFr1 billion third quarter profits (in spite of the rogue trading losses) compared to SFr683 million by Credit Suisse.

It remains to be seen if investors will be fully convinced by UBS’s plans despite being buttered up by news of a nominal dividend of SFr0.10 per share for the year.

Shares in the bank fell 2.87 per cent on the Swiss stock exchange to SFr10.49 per share at the close on Thursday, just before the new strategy was announced. 

Leadership reshuffle

UBS’s new strategy will be implemented by a new leadership team, the bank confirmed earlier this week.

Sergio Ermotti has been formally crowned as UBS’s fourth chief executive in as many years.

Ermotti had been holding the fort on an interim basis after a rogue trading scandal forced Oswald Grübel’s resignation in September.

UBS shareholders have been asked to approve the appointment of Axel Weber as chairman during the bank’s next annual general meeting in May 2012.

Weber would then replace Kaspar Villiger a year earlier than previously planned. Weber would be the bank’s fourth chairman in four years.

UBS woes

Switzerland’s biggest bank was flying high in 2007, announcing record quarterly profits of SFr5.6 billion in the second quarter of that year.

  

This figure was achieved despite the collapse of its Dillon Read Capital Management hedge fund. However the figures hid problems that only started to come to light after the sudden departure of chief executive Peter Wuffli in July of that year.

  

The profits turned into a SFr726 million loss in the third quarter as the bank started writing down subprime mortgage and debt security trades. The bank eventually lost some SFr50 billion in the financial crisis.

In 2008, the situation had become so bad that the Swiss National Bank was forced to bail out UBS with a SFr6 billion loan and by taking over bad debt.

UBS also admitted to aiding and abetting US tax evaders and was forced to pay a $780 million fine in 2008. It later had to release the names of 4,450 clients to the US authorities, denting its own reputation and Swiss banking secrecy laws.

Share prices fell from a high of SFr70 in 2006 to under SFr10 in 2009.

Former Credit Suisse boss Oswald Grübel took over as CEO in 2009 with a mandate to turn UBS around. The bank was back into the black for the full year in 2010 to the tune of SFr7.2 billion.

But results have disappointed so far this year, leading to the bank cutting profit forecasts and 3,500 jobs.

In September, UBS revealed that a rogue trader had cost the bank an estimated $2 billion in unauthorised trades. The scandal forced Grübel’s resignation later in the same month.