Woes for Switzerland's UBS Drag On

Posted by: Mark Scott on April 15, 2009

Swiss financial giant UBS must wonder when the pain is going to stop. On Apr. 15, the Zurich-based bank announced a $1.74 billion net loss for the first quarter of 2009, and a further 7,500 job cuts worldwide by 2010. That means UBS will have slashed its workforce almost 20% since 2008, on top of unveiling almost $50 billion of write downs and losses since the credit crunch began.

Rubbing salt into the wounds, clients moved $20 billion out of UBS’ wealth management division in the first three months of 2009 — a sign that losses from its investment operations have taken a toll on the bank’s reputation. Still, UBS hasn’t done itself any favors. The multi-billion dollar outflow, in part, stems from the Swiss bank admitting to tax evasion charges in the U.S. That led to a $780 million settlement in February with the U.S. Department of Justice after UBS said it had helped U.S. clients hide accounts from the IRS.

All in all, then, newly-appointed CEO Oswald Grübel faces a daunting challenge turning around Switzerland’s largest bank.

For sure, Grübel was successful last time he took control of a floundering bank. He's widely credited for rescuing Credit Suisse, the country's second largest financial institution, after it made a mistimed move into the insurance business in the early 2000s.

Back then, Grübel mimicked rival UBS' practice of combining its investment and wealth management divisions to squeeze out cost savings and open up new sources of capital. As such an overly cozy relationship between both business units played a major role in UBS' current problems, it's a safe bet he won't be pursuing a similar strategy this time around.

On Apr. 15, Grübel gave more detail on his plans. They include $3 billion to $3.5 billion more cost cuts by the end of 2010. UBS also will pull back from "high-risk" businesses -- presumably highly-sophisticated trading operations -- while maintaining its core international wealth management and Swiss banking practices.

However the turnaround is organized, UBS better hope the light at the end of the tunnel comes soon rather than later. Rivals Goldman Sachs, Credit Suisse, and Germany's Deutsche Bank all posted bullish first quarter figures, compared to UBS' $1.74 billion loss. So if Grübel can't work his magic a second time, Switzerland's largest bank may soon lose out to stronger competitors.