UBS Plans 10000 Job Cuts, Raises Profitability Goal

UBS AG (UBSN), Switzerland’s biggest bank,
boosted its profitability goal and announced plans for about
10,000 job cuts as Chief Executive Officer Sergio Ermotti scales
back the investment bank to focus on wealth management.

UBS will seek a return on equity, a measure of
profitability, of at least 15 percent starting in 2015, compared
with a previous goal of 12 percent to 17 percent, the Zurich-
based bank said today. It will reduce staff by more than 15
percent to about 54,000 over three years to help save an
additional 3.4 billion Swiss francs ($3.6 billion).

Ermotti is overhauling the bank as Swiss regulators
pressure UBS and Credit Suisse Group AG (CSGN) to boost capital and
reduce risky activities. UBS will retreat from capital-intensive
investment-banking businesses such as fixed-income trading and
rely more on its wealth management unit, the world’s second
largest, to boost returns for shareholders.

“They’re admitting that they’re not a bulge-bracket
investment bank and will never be, which is sensible considering
the new capital requirements,” said Florian Esterer, a fund
manager at MainFirst Schweiz AG in Zurich. “UBS is returning to
the business model of a classic private bank.”

UBS jumped as much as 7 percent in Swiss trading, and was
up 6.6 percent to 13.98 francs by 9:14 a.m. That follows a 7.3
percent gain yesterday after news reports on the company’s
reorganization plans. The stock is up 25 percent this year,
compared with a 16 percent gain in the Bloomberg Europe Banks
and Financial Services Index (BEBANKS), which tracks 38 companies.

Net Loss

The bank posted a net loss of 2.17 billion francs in the
third quarter, compared with a profit of 1.02 billion francs a
year earlier, after booking a pretax impairment charge of 3.1
billion francs related to goodwill and other non-financial
assets associated with the investment bank. Analysts surveyed by
Bloomberg estimated UBS would report a 439 million-franc profit.

The reorganization will result in restructuring charges of
3.3 billion francs over the next three years, UBS said. That
total includes about 500 million francs in the fourth quarter,
which will probably lead to a net loss for the period. Group
return on equity will average in the mid-single digits next year
and in 2014, the bank said.

Wealth management posted a 32 percent drop in third-quarter
pretax profit to 600 million francs and the retail and corporate
unit saw earnings decline 40 percent to 409 million francs as
the year-earlier figures for the businesses benefited from the
sale of assets. Earnings at wealth management Americas jumped 58
percent to 219 million francs and asset management climbed 57
percent to 124 million francs.

Confidence, Experience

The investment bank posted a pretax loss of 2.87 billion
francs compared with a 2.1 billion-franc loss a year ago, when
it booked a loss from unauthorized trading. Wealth management
units attracted 12.3 billion francs in net new funds from
clients. The bank’s Basel III common equity ratio rose to 9.3
percent from 8.8 percent in the second quarter.

“It can’t get better than this point for us to act,”
Ermotti, 52, told journalists at a briefing. “We have
confidence, we have experience and the credentials to do that,
and we have a capital base that allows us to do that,” compared
with a year ago when the bank announced its last reorganization
plans.

UBS will trim risk-weighted assets by about 100 billion
francs by the end of 2017 as it shrinks the fixed-income
businesses of the investment bank. The bank will cut risk-
weighted assets at the fixed-income unit by 80 billion francs
from 110 billion francs. Of these, about 30 billion francs will
come from credit businesses and 40 billion francs from rates,
the bank said.

Orcel’s Role

The investment bank will keep its advisory business, as
well as equities, foreign exchange and precious metals units,
and will maintain facilitation capabilities in rates and credit.
Equity allocated to the unit will drop to 35 percent next year
from 65 percent currently.

The investment bank is expected to contribute about 20
percent to the group’s pretax profits in future, the bank said.
Wealth management units, retail business and asset management,
which will be contributing 80 percent, had annual average pretax
earnings of 5 billion francs over the past two years.

Investment-bank co-head Carsten Kengeter will step down
from the group’s executive board and take charge of winding down
the non-core assets. Andrea Orcel, a 49-year-old former
dealmaker at Bank of America Corp. who has co-headed the
investment bank with Kengeter, 45, since July, will become the
sole head of the unit.

Kengeter Role

Ermotti said Kengeter has a “very important role” in the
revamp and that he has confidence the investment-banker will
stay to see his task through. Ermotti declined to say whether
the reorganization will result in departures of business heads.

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 yesterday. 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.

‘Significant Step’

The reorganization is “the most significant step yet for
the industry, which could be positive for other players,
although we would expect other banks to also re-evaluate their
business models,” Credit Suisse analysts led by Amit Goel said
in a note yesterday. “The benefit UBS has over some peers is
another more profitable franchise, for Barclays and Deutsche
Bank there is less room to maneuver.”

Deutsche Bank AG reported a 3 percent increase in third-
quarter net income today, while Barclays Plc publishes earnings
on Oct. 31. Credit Suisse said last week it plans to cut costs
by an additional 1 billion francs by the end of 2015 after
posting a 63 percent drop in net income to 254 million francs,
in part because of a 1.05 billion-franc pretax accounting charge
related to the bank’s own debt.

The revamp “further strengthens our view on UBS’s ability
to pay material dividends,” Kian Abouhossein, a London-based
analyst at JPMorgan Chase Co., said before today’s release. He
forecasts the bank may pay a dividend of 65 centimes a share for
2013, implying a dividend yield of 5.3 percent.

S.G. Warburg

UBS, which paid its first cash dividend in five years for
2011, amounting to 10 centimes a share, said it plans in the
future to pay out more than 50 percent of earnings to
shareholders, depending on its capital needs. The bank aims to
achieve the 13 percent Basel III common equity ratio in 2014.

The bank is accruing a dividend for this year and doesn’t
rule out making a payout to shareholders even in the likely
event of posting an annual loss, Ermotti said. A final decision
on the dividend will be made at the end of the year, he added.

Personnel reductions will amount to more than 15 percent of
the 63,745 people the bank employed at the end of September.
About 2,500 of the job cuts will be in Switzerland, where the
company employed more than 23,000 people at the end of last
year, and the rest will mainly come from London and the U.S.,
Ermotti said. UBS is adding to 3,500 global job cuts it
announced last year to save 2 billion francs in annual costs.

Front Office

UBS will cut about 2,000, or 28 percent of about 7,200
front-office staff at the investment bank and will make
proportional cuts in the supporting functions, he said. Other
divisions won’t see front-office job reductions beyond natural
fluctuations, he added.

UBS also plans to make investments totaling 1.5 billion
francs over the next three years to help all its businesses
compete and gain market share, the bank said. The bank will
“forcefully compete in every area” it chooses to be in,
Ermotti said, adding that concrete decisions on investments
haven’t been made yet.

“This will take the business back to S.G. Warburg’s
roots,” Christopher Wheeler, an analyst at Mediobanca SpA, said
before the earnings were released. “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?”

Past Lapses

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.

The investment bank has suffered lapses that shook UBS.
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.

To contact the reporter on this story:
Elena Logutenkova in Zurich at
elogutenkova@bloomberg.net

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

Tags:

Tuesday, October 30th, 2012 EN

No comments yet.

Leave a comment

You must be logged in to post a comment.