Bloomberg News

UBS Cutting Investment Bank Seen Freeing Investors Cash

October 29, 2012

UBS Cutting Investment Bank Seen Freeing Cash for Investors

UBS's decision to cut as many as 10,000 jobs and retreat from capital-intensive trading businesses will help position Switzerland’s largest bank to return more funds to shareholders. Photographer: Valentin Flauraud/Bloomberg

UBS AG (UBSN)’s decision to cut as many as 10,000 jobs and retreat from capital-intensive trading businesses will help position Switzerland’s largest bank to return more funds to shareholders.

UBS intends to split off and wind down much of its fixed- income operations, reducing risk-weighted assets by an additional 100 billion Swiss francs ($107 billion), said a person with knowledge of the matter who requested anonymity because the plans are private. The revamp may help the Zurich- based bank meet capital goals faster than it would otherwise. UBS rose the most since January in Swiss trading.

Chief Executive Officer Sergio Ermotti is overhauling the bank as Swiss regulators pressure UBS and Credit Suisse Group AG (CSGN) to boost capital and scale back trading and investment-banking operations. Ermotti, 52, said in July that once the bank reaches its capital targets under Basel III rules, UBS plans to “implement a policy of returning capital to our shareholders in different forms.” The bank paid its first cash dividend in five years for 2011, amounting to 10 centimes a share.

“UBS is going back to its roots,” said Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co. “UBS is in fact the easiest restructuring story besides Credit Suisse by closing most of fixed income, cutting back-office costs, freeing up capital and becoming even more wealth-management geared.”

‘Material Dividends’

UBS will be able to pay “material dividends” as it shrinks the investment bank, said Abouhossein, who forecasts the bank may pay a dividend of 65 centimes a share for 2013, implying a dividend yield of 5.3 percent.

UBS rose 7.3 percent to 13.12 francs, the biggest advance since Jan. 19. The stock is up 17 percent this year, exceeding the 15 percent gain in the Bloomberg Europe Banks and Financial Services Index, which tracks 38 companies.

The additional cuts would leave the investment bank with less than 35 billion francs in risk-weighted assets and UBS as a whole with less than 140 billion francs, based on targets the company previously disclosed for 2016. As UBS aims for a Basel III common-equity ratio equal to 13 percent of risk-weighted assets, it will need about 18.2 billion francs in common equity once the cutting is done. At the end of June, UBS already had 26.7 billion francs in common equity.

Facing Reality

“I think the market will welcome UBS facing up to the reality that it is not a market leader in fixed income,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA.

The bank’s executive board, headed by Ermotti, met in New York last week to consider the reorganization, people familiar with the discussions said. The board of directors is headed by Chairman Axel Weber. Serge Steiner, a spokesman for UBS, declined to comment.

An announcement may come when UBS reports third-quarter earnings tomorrow, the person said. The company may report net income of 487.6 million francs, down from 1.02 billion francs a year earlier, according to the average estimate of nine analysts surveyed by Bloomberg.

Many of the reductions will occur in the trading businesses overseen by investment-bank co-head Carsten Kengeter and probably will occur over several quarters, said the person familiar with the bank’s plans.

Much of the fixed-income operations will be put into a new unit that will hold assets to be wound down over time, and Kengeter will probably give up his current role to head that unit, the person said.

Roberto Hoornweg

Roberto Hoornweg, who co-leads the firm’s fixed income, currencies and commodities unit with Rajeev Misra, is likely to leave, two people familiar with the matter said today. Misra will probably remain at UBS, the people said. Hoornweg is responsible for foreign exchange, money market and interest-rate sales and trading, as well as commodities and the investment bank’s treasury trading activities.

The details of his departure haven’t yet been finalized, one of the people said. A UBS official in London declined to comment, as did Hoornweg when reached on his mobile phone.

While UBS’s leading position in foreign exchange “supports an ‘invest and grow’ strategy, the credit flow and structured rates businesses appear most at risk,” Citigroup Inc. analysts led by Kinner Lakhani, said in a note today. “Assuming a wholesale exit from credit, emerging markets and rates franchises could suggest a potential further ‘wind-down’ of 70 billion francs to 75 billion francs” of risk-weighted assets and the release of 11 billion francs in capital.

S.G. Warburg

The changes at the investment bank may mean increased responsibilities for 49-year-old Andrea Orcel, a former dealmaker at Bank of America Corp. who has co-headed the investment bank with Kengeter, 45, since July, three people with knowledge of the matter said last week.

“This will take the business back to S.G. Warburg’s roots,” said Wheeler. “The question remains the execution risk. Can they keep staff, including Kengeter? What will it cost to retain them and what losses might the unit take?”

Swiss Bank Corp. bought S.G. Warburg & Co., the advisory firm founded by Siegmund Warburg, in 1995, before joining with Union Bank of Switzerland to form UBS in a deal completed in 1998.

Kengeter was appointed to co-lead the investment bank with Alexander Wilmot-Sitwell by former CEO Oswald Gruebel in April 2009, months after he joined from Goldman Sachs Group Inc. at the nadir of the subprime mortgage crisis. Wilmot-Sitwell, 51, has since joined Bank of America.

‘Loser’s Game’

Ermotti told his staff in a memo this month he’ll do whatever it takes “to tackle the current challenging market environment and paradigm shift” in banking. Like rival securities firms, UBS has been struggling to boost profitability as client activity and trading remain sluggish.

“It was a loser’s game for them,” said Terry Connelly, former dean of the Ageno School of Business at Golden Gate University in San Francisco and an ex-managing director at Salomon Brothers Inc. “It wasn’t their fault, they simply tried climbing the wrong mountain.” High fixed costs and slack demand have made it harder to be profitable, and the industry will have to shrink more, he said.

“UBS is a microcosm for the industry,” Mark Williams, a lecturer at Boston University’s School of Management, said in an interview. “The banking business model is changing and we’ve got to look at cost structure, we’ve got to look at compensation, and we’ve got to readjust.”

UBS had about 63,250 employees as of June 30, according to its most recent financial report, which means the staff cut could equal 16 percent. UBS had already announced it was reducing risk-weighted assets at the investment bank by more than half from September 2011 levels, mostly in fixed income.

Reveal Value

The remaining businesses at the investment bank will include a slimmed-down advisory unit, equities trading and research, foreign exchange, government debt trading and limited credit and corporate bond trading, according to the person familiar with the bank’s plans. Capital demands by Swiss regulators, among the strictest in the world, are making it hard for UBS to compete in capital-intensive businesses such as fixed-income trading.

“Investors want UBS to reveal the value of the asset and wealth management businesses, which will make 26 percent returns on our 2013 estimates, and downsize materially the investment bank, which struggles to make single-digit returns,” said Huw van Steenis, a London-based analyst at Morgan Stanley.

Past Mistakes

The investment bank has suffered lapses that shook UBS, the world’s second-largest wealth manager. Losses during the subprime crisis forced UBS to seek a bailout from the Swiss government in 2008 to help it spin off toxic assets. Last year a $2.3 billion loss from unauthorized trading led to the exit of Gruebel, 68.

Lack of demand in the banking industry means another round of dismissals is likely on Wall Street, permanently damaging careers of some investment bankers, Connelly said.

“People will have a while on the beach,” he said. “Their business has been commoditized to the point where their brains don’t count as much. A lot of investment bankers will have to find another way to make money.”

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net


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