Investment banking is becoming obsolete

UBS is downsizing its investment banking

With its capital strengthened, UBS is doing its best to curtail its investment banking. The quarterly loss of CHF 2.2 billion reflects the bank's changeover, which wants to be successful in asset management in the future.

UBS, which had already received advance praise on the stock exchange on Monday, presented a series of measures on Tuesday, at the center of which are a return to the asset management business and, at the same time, a resolute curtailment of the investment bank, which has devastated a lot of capital over the years. The redimensioning, which is scheduled to run for two and a half years, will be accompanied by the removal of approximately 10,000 positions. Under the leadership of the Chairman of the Board of Directors, Axel Weber, the bank has now tightened the strings in order to implement the new strategy that was communicated a year ago. The stock exchange acknowledged the news with advances; UBS shares rose another 5.8% on Tuesday to CHF 13.89.

Lengthy cleanup

The restructuring of the business model provides for a resolute withdrawal from investment banking activities, especially from the business with fixed-income securities, which tie up a lot of capital. The bank’s total assets are expected to decrease by 30% or CHF 300 billion by 2015. Large positions - risk-weighted assets of CHF 90 billion according to «Basel III» - will be removed from the investment bank and moved to the Corporate Center. The disempowered Carsten Kengeter, who is consequently leaving the Executive Committee, will primarily be involved in the marketing of these positions in the coming years, including the legacy portfolio managed on behalf of the Swiss National Bank and other things (another CHF 50 billion) be.

In the third quarter, this feat of strength led to a write-down of goodwill in investment banking by CHF 3.1 billion (to CHF 6 billion across the group) and swell the quarterly loss to over CHF 2 billion. In London, the first UBS employees had to clear merchant desks on Tuesday; a total of around 2000 offices at the front and many related rear services will be closed over a period of around two and a half years. This is associated with one-off restructuring costs of another CHF 3.3 billion, of which around CHF 400 million will be incurred in the fourth quarter.

CEO Sergio Ermotti made it clear that this transformation process will quickly enable billions of euros to be saved. It is unclear exactly where jobs will be cut in Switzerland - we are talking about 2,500 jobs. But there is no doubt that there will be many layoffs in Switzerland too. Jobs in IT, administration and generally in the back office are becoming obsolete as a result of the tough cut in investment banking, but bankers in the USA and London will be worst hit.

Release of venture capital

The downside of the development, which many employees feel is depressing, is that the curtailment of investment banking will enable the freeing up of risk capital that can be better used elsewhere or returned to shareholders. If Ermotti and his crew work out, after the two transition years of 2013 and 2014, UBS will be solid with returns on equity in the mid-single-digit range in order to be able to reliably pay dividends from 2015 onwards from stable sources of income. A return on equity of 15% and annual distributions of 50% and more from 2015 onwards have been promised. While four fifths of all income will one day be generated in wealth management (and asset management), the investment bank led by Andrea Orcel is to contribute the remaining fifth in selected sectors - which, according to Ermotti, will continue to be invested in in the future. The focus is on advisory services as well as stock, foreign exchange and precious metal trading at the customer's risk. The investment bank is therefore to be operated with risk-weighted assets of less than CHF 70 billion - compared to CHF 162 billion most recently. The radical cure is reflected in the fact that the unit that is to serve wealth management and customers in the future will still receive equity of 7 billion (currently CHF 22 billion) within the group.

The dead live longer

In operational matters, UBS achieved quite a bit in the third quarter. A tax credit of CHF 345 million could only partially offset a burden of CHF 863 million from the revaluation of own liabilities; but the bottom line was a pre-tax profit of CHF 1.4 billion. The Wealth Management business unit benefited from a stable inflow of new money (CHF 7.7 billion), and the adjusted cost / income ratio of 67% was already where the bank as a group would like it to be in a good two years. The margin has weakened slightly since the beginning of the year to 89 basis points, which was hardly a cause for concern because, as elsewhere, the reluctance of customers was reflected in little change in commission income. More than 11,000 client advisors work for the bank worldwide.

The Wealth Management Americas unit then seems to be gradually getting into shape after an arduous approach. With a quarterly profit of $ 230 million before taxes, the best result for a long time was achieved, but in comparison to that, the Swiss bank (in new German: Retail & Corporate) was a lot heavier, after all, it came up with a profit of at least 409 million. Although Swiss franc interest rates were very low, UBS benefited from the good economic situation in its home market compared to other European countries. Ermotti suggested that Switzerland should invest more in new services such as e-banking.

Excluding the trade loss devouring around $ 2.3 billion by Kweku Adoboli in the previous year, Investment Banking increased total revenues in the third quarter by 28% to CHF 2.3 billion. The unit, which had 16,600 employees at the end of September, generated before taxes and before the CHF 3 billion absorbing goodwill impairment - a profit of CHF 178 million. The bank was allowed to support two of three major IPOs and even increased its market share slightly in bond issues. It will now be up to Orcel to keep the heavily resized investment banking on course.