Bloomberg News

UBS’s Trading Loss May Harm Bid to Lure Millionaire Clients

September 29, 2011

(Updates with comment from interim CEO in 22nd paragraph.)

Sept. 29 (Bloomberg) -- UBS AG may struggle to regain its position as the world’s biggest wealth manager after the $2.3 billion trading loss at its investment bank.

Wealthy clients entrusted the Zurich-based bank with 22.9 billion Swiss francs ($25.1 billion) of new money in the first half of this year, after customers pulled a net 198.7 billion francs from the business in nine quarters through June 2010.

Bank of America Corp. and Morgan Stanley leapfrogged UBS during the credit crisis, after customers were spooked by record writedowns and a U.S. probe into whether Switzerland’s biggest bank helped American clients evade taxes. The trading loss widened the rift between UBS’s two key units and triggered the exit of Chief Executive Officer Oswald Gruebel, who had asked wealth managers to forge closer links with investment bankers.

“It’s the third time in as many years that confidence in UBS has taken a hit,” said Matthew Czepliewicz, an analyst at Collins Stewart Hawkpoint Plc in London, in an interview. “As long as there are other convenient options, most notably Credit Suisse or foreign banks that have been trying to build up in the market, there’s a risk that money might flow elsewhere.”

Smaller Zurich-based rival Credit Suisse Group AG attracted more than 125.7 billion francs of assets since UBS received a Swiss government bailout in October 2008.

“UBS is monitoring the situation, however, we haven’t observed any significant outflows,” said Zurich-based spokesman Yves Kaufmann, responding to the question of whether clients have withdrawn money following the trading loss.

Tax Evasion

UBS wealth management in Switzerland provides individuals with at least 250,000 francs of disposable assets with investment advice and offers services such as retirement planning. The business is headed by Bob McCann in the Americas and Juerg Zeltner in the rest of the world.

When UBS was charged in 2009 with helping U.S. clients evade taxes, the bank avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the U.S. Internal Revenue Service data on more than 250 accounts. It later turned over data on another 4,450 accounts.

After attracting the most new money from wealthy customers since the end of 2007 in the first quarter, Gruebel attributed the gains to “the return of client trust and confidence.” First-half pretax profit from wealth management was 1.57 billion francs, 30 percent higher than earnings from the investment bank, which had the lowest share of revenue among its eight largest peers.

Reputation Fundamental

“Reputation is fundamentally important to all banks but especially so at UBS,” said Fiona Swaffield, an analyst at RBC Capital Markets in London. “The bulk of the share price is thanks to the wealth management unit.”

UBS shares have rebounded to 11.47 francs, after slumping 11 percent to 9.75 francs on the day the bank disclosed the loss. The stock is down 25 percent this year, compared with a 29 percent decline in the 46-member Bloomberg Europe Banks and Financial Services Index.

Sergio Ermotti, 51, the bank’s European head and a former derivatives banker, was appointed as interim CEO to replace Gruebel, 67.

Now may be the time to rebuild UBS around its private banking business, said Beat Wittmann, head of Zurich-based Dynapartners and former chief of investment products at Julius Baer Group AG. Spinning off the investment bank or devoting it to supporting the wealth-management business could boost the shares by as much as 50 percent, he said.

Wealth Focus

“It will not be enough for the board to tell stories about improving risk management,” said Wittmann. “They need to spin off and list the investment bank separately and nominate a chief executive officer from a wealth management background.”

UBS oversaw $1.56 trillion for wealthy investors at the end of last year, compared with $1.95 trillion at Charlotte, North Carolina-based Bank of America and $1.63 trillion at New York- based Morgan Stanley, according to a survey by Scorpio Partnership, a London-based provider of research and industry analysis.

The investment bank will “carry less risk” in future and be more closely aligned with the wealth management business that will be further expanded, Chairman Kaspar Villiger, 70, said on Sept. 24 after Gruebel quit.

UBS is “committed” to developing its wealth management Americas business, according to a memo from Villiger and Ermotti to employees that they said was in response to persistent “rumors.”

‘Remain Unscathed’

“While the event may cause reputational damage in the short term, the core wealth management franchise is likely to remain unscathed,” Teresa Nielsen, an analyst at Vontobel Holding AG in Zurich with a buy rating on UBS, wrote in a note to clients.

The profitability of Swiss wealth managers is being eroded by a global crackdown on tax evasion. Agreements last month to end disputes over tax evasion with Germany and the U.K. may trigger outflows as clients question the value of cross-border accounts as Swiss banking secrecy crumbles.

In the future, private bankers “will spend more time with their clients with less effect on the bottom line,” Lukas Ruflin, deputy CEO of EFG International AG, a Swiss private bank with about 80 billion francs in assets under management, said at a conference in Zurich on Sept. 27.

The loss from unauthorized trading has sapped morale among UBS wealth and asset managers, according to a bank executive, who requested anonymity because he isn’t authorized to speak publicly.

‘No Magic Recipe’

“I know that over the past several years you have heard plenty of entreaties to continue doing your utmost and avoid being distracted. I imagine by now you are tired of them,” interim CEO Ermotti said in another memo to employees. “I have no magic recipe to inspire you to redouble your efforts. I can only appeal to your professionalism, your loyalty and your determination to succeed.”

While the trading loss is a “severe setback” to the company’s efforts to regain trust, the investment bank remains an “essential part” of meeting the expectations of UBS clients, he said.

“This is a big knock and will put the client advisers on the defensive again rather than the offensive,” Swaffield said.

About 35 percent of the 3,500 job cuts announced by UBS on Aug. 23 will come from wealth management while 45 percent of the reductions are at the investment bank.

‘Growth Opportunities’

In UBS’s Zurich headquarters, investment bankers can make pitches to relationship managers in a bid to tap the funds of millionaire clients. UBS hopes the ability to leverage investment-banking expertise and repackage ideas for wealthy clients gives it an edge over smaller Swiss private banks.

“It’s very important that we have the investment-banking platform to support our clients,” said Allen Lo, the bank’s head of wealth management in Hong Kong. “Asia-Pacific offers enormous long-term growth opportunities.”

Growth in Asia and other emerging markets is driving the rebound in UBS’s wealth management business and will help counter withdrawals by clients in the U.S. and Europe, analysts said.

While UBS’s wealth business took five quarters to rebound after the lawsuit in the U.S., the trading loss may prove less of a stigma, said Matt Clark, an analyst at Keefe, Bruyette & Woods Ltd. in London.

“It may result in weaker flows for a quarter or two but in a couple of years time I don’t think it will have materially altered their profile,” he said.

--Editors: Dylan Griffiths, Stephen Taylor.

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Frank Connelly in Paris at fconnelly@bloomberg.net


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