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UBS May Cut Pay in Securities to Hit Goal, Morgan Stanley Says

December 07, 2011

Dec. 6 (Bloomberg) -- UBS AG, the biggest Swiss bank, may cut compensation for employees at its investment bank to help reach a profitability target faster, Morgan Stanley analysts said.

Compensation costs at the investment bank of the Zurich- based company may need to be cut by about a third in 2013 compared with this year for the unit to reach the bottom end of its 12 percent to 17 percent pretax return-on-equity target, analysts Huw van Steenis and Hubert Lam wrote in a note today.

“We see flex in cost base as an option for UBS to deliver faster on its ROE target, particularly in the investment bank, where we think targets may be more of a stretch,” the analysts wrote. “But we acknowledge that reducing comp to the extent modeled in our scenario could be offset by potential staff departures.”

The investment bank, which is planning to reduce headcount by almost 2,000 by the end of 2016, has a “relentless drive to eliminate excess costs,” Carsten Kengeter, who heads the division, told investors in New York last month. The unit aims to reach the ROE target from the beginning of 2013 as it cuts risk-weighted assets by 145 billion Swiss francs ($156 billion) over the next five years.

The division is unlikely to hit the target in 2013, with pretax ROE of about 8 percent, if compensation costs are reduced less aggressively by about 21 percent that year compared with 2011, according to Morgan Stanley estimates. The unit’s pretax ROE this year may be about 2 percent, the analysts estimated.

UBS’s risk-weighted asset reduction plan is “challenging given tough markets and simultaneous sector deleveraging of 1.5 trillion euros ($2 trillion) to 2.5 trillion euros,” the analysts said. “The greatest risk lies in reducing these assets whilst limiting losses to capital.”

The analysts cut their price target for UBS shares to 12.5 francs from 13 francs as they reduced earnings per share estimates on possible losses from deleveraging. They have an “equal-weight” rating on the stock.

UBS was unchanged at 11.40 francs in Zurich trading at 11 a.m., having fallen 26 percent this year.

--Editors: Jon Menon, Dylan Griffiths

To contact the reporter on this story: Elena Logutenkova in Zurich at

To contact the editor responsible for this story: Frank Connelly at

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