UBS scraps ambitious earnings targets

Oswald Grubel, chief executive, confirmed the bank scrapping its medium-term profit target of SFr15bn, as it embarked on a sweeping cost-cutting programme

UBS is downsizing its investment bank and cutting thousands of jobs across the group after a dismal second quarter laid bare the Swiss bank’s ongoing struggle to rebuild its business.

Oswald Grübel, chief executive, told the Financial Times that UBS’s investment banking arm would focus on supporting its flagship wealth management business, rather than competing with global rivals in capital-intensive areas such as fixed-income trading.

“The question that we really had to ask ourselves is how much trading do we need in our investment bank to satisfy the demands of our wealth management business, and how much do we need to build on top of that to be relevant as an investment bank,” he said.

After barely surviving the financial crisis, UBS is pinning its future on continued growth in private banking, particularly in Asia and other fast-growing markets, rather than more volatile trading profits. Analysts and investors have long agreed that the wealth management arm, which in 2009 settled a long-running tax evasion probe with US regulators, is the jewel in UBS’s crown.

The investment bank, by contrast, has lost momentum in spite of hiring hundreds of bankers over the past two years. The division’s pre-tax profits slumped 71 per cent during the second quarter, to SFr376m, compared with the same period last year.

Mr Grübel also confirmed UBS was scrapping its medium-term profit target of SFr15bn, as it embarked on a sweeping cost-cutting programme aimed at saving as much as SFr2bn over the next three years.

“You can not continue to hold on to a number that looks totally unbelievable,” Mr Grübel said.

Across the group, net profits dropped to SFr1.0bn, down 49 per cent from SFr2.0bn in the second quarter of 2010. Revenues fell 22 per cent, to SFr7.2bn.

Similar to its Wall Street competitors, UBS suffered from the sharpest fall in revenues in its fixed income, currencies and commodities unit. The cost to income ratio within the investment bank crept up to 86 per cent in the second quarter, by far the highest ratio in the industry.

Several analysts questioned, however, whether a rather a limited restructuring of the investment banking, as opposed to a full break-up, would solve UBS’s woes.

“While a partial downsizing of some investment banking activities may be positive for leverage and mix, it leaves the tough question of how viable and how profitable a mid-sized investment bank can be,” said analysts at Barclays Capital. “Memories of ABN AMRO come to mind.”