As UBS embarks on a sweeping restructuring of its investment bank in the wake of a $2.3bn alleged rogue trading scandal, there are obvious targets for retrenchment.
Whether senior executives – including Sergio Ermotti, the Swiss group’s newly appointed interim CEO – will be able to shrink the business fast enough to satisfy regulators and investors may be the bigger challenge, analysts say.
UBS’s investment bank, which has lurched from crisis to crisis over the past 15 years, lost one of its biggest advocates on Saturday with the exit of Oswald Grübel, the veteran banker who headed both of the country’s biggest banks during his career.
After spending the past 18 months rebuilding areas of the business that had been battered by the financial crisis, most notably a fixed-income division that wrote off $50bn worth of toxic debt, Mr Grübel believed an integrated banking group needed to retain a substantial presence in investment banking, according to people familiar with the situation.
Now that he has left, analysts are pushing for Mr Ermotti to wield a much sharper axe. A close look at the group’s business mix and capital allocation shows why. In 2010, UBS’s investment bank accounted for 60 per cent of allocated capital or risk-weighted assets (RWAs), but just 35 per cent of pre-tax profits, according to RBC Capital Markets. By contrast, Its flagship wealth management business accounted for 33 per cent of pre-tax profits, but just 8 per cent of allocated capital and RWAs.
So far, UBS has provided little detail about its plans for slimming down the investment bank, which will be revealed in full at an investor presentation in New York on November 17.
But some UBS insiders remain concerned that senior executives have not fully grasped the scale of the changes ahead, including the thousands of job cuts that may need to be made.
UBS has already announced 3,500 job losses across the group, about half of which will fall within the 17,700-person strong investment bank. A more credible number is closer to 10,000, several analysts said, which means 5,000 in additional job losses in a business already suffering from rock-bottom morale.
UBS has already mapped out a programme for shutting down the capital-intensive businesses in a fixed income unit that consumes two-thirds of the investment bank’s capital, such as structured rates and credit desks. But some executives want to retain a foothold even in trading operations that will be most disadvantaged by a global rewrite of bank capital requirements, according to people familiar with the situation.
UBS’s risk-weighted assets rose by nearly 5 per cent in the second quarter of 2011, according to analysts at Morgan Stanley, signalling there is resistance to larger-scale cuts. Executives remain keen, for example, to retain its fixed income operations in the US in spite of repeated calls for these to be shuttered.
Several analysts questioned whether the weekend’s management uphea-val would further disrupt efforts to reshape the size and function of the investment bank.
“The decision to carry out a far ranging review of UBS’s business to address the much changed market conditions, was absolutely correct,” says Chris Wheeler at Mediobanca. “However, even before the results have been announced the bank has put the execution of the plan in jeopardy.”
What operations UBS will try to hold on to is easier to forecast: foreign exchange, where it remains a top operator, its equities franchise, and its advisory and underwriting businesses. In theory, those are capital-light, less risky areas, although $2.3bn in alleged unauthorised trading losses on the bank’s Delta One desk in the bowels of the equities division have severely tested that maxim.
Winning lucrative mergers and acquisitions and initial public offering mandates from its so-called “ultra high net worth” clients will be crucial to that strategy, as will selling higher-margin investment banking products.
“From a long-term perspective, UBS is refocusing on a business that is less risky, but carries a higher return,” say analysts at Goldman Sachs. “This is a long-term positive, in our view.”
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