November 17, 2011

UBS to Trim Investment Bank, Emphasize Wealth Management

The U.S. operations, CEO Ermotti says, are a key part of the firm’s growth strategy

UBS' headquarters in Zurich; the company revealed its new strategy to get the bank back on course. (Photo: AP) UBS' headquarters in Zurich; the company revealed its new strategy to get the bank back on course. (Photo: AP)

UBS (UBS) revealed plans Thursday to strengthen its wealth-management units while scaling down its investment bank and introducing new performance targets companywide.

These strategies were made public one day after a tribunal in the United Kingdom disclosed that UBS had unauthorized trading on the Africa desk of its U.K. wealth-management division in 2007 and initiated a review of its compliance procedures, according to a report in the Financial Times.

UBS says that the latest corporate strategy “is centered on its wealth-management businesses and [that] it will strengthen its leadership position in the most attractive markets,” according to a press release.

The investment bank–where unauthorized trading led to a $2.3 billion loss earlier this year–is set to become “more focused and less complex,” company says. “Basel 3 risk-weighted assets in the investment bank of about 300 billion Swiss francs today are targeted to be reduced by about 145 billion Swiss francs, or almost 50%,” UBS said in a statement.

UBS says its overall return-on-equity target will be between 12% and 17% starting in 2013. The firm intends to propose a dividend of 0.10 Swiss francs per share for 2011 and a “progressive capital return program thereafter.”

sergio ermotti“UBS is acting from a position of strength, and we are adapting our strategy to deliver more attractive returns to shareholders and to reflect economic and regulatory change,” said CEO Sergio Ermotti (left), in a statement. “We have chosen to substantially reduce the risk profile of the bank by exiting and downsizing businesses which are not value added to our client franchise or deliver unattractive risk-adjusted returns.”

For the past year or so, industry experts have speculated that UBS could put its U.S.-based wealth-management operations up for sale. But Ermotti moved to counter such rumors. The number of financial advisors in the unit is about 6,913.

“We will continue to invest in products and geographies where we see opportunities to grow, particularly in our wealth-management businesses,” he said. “UBS plans to extend its leadership positions in Switzerland, Europe, Asia Pacific and the emerging markets and will continue to build on wealth-management Americas’ successful execution track record.”

According to UBS, its investment bank will leave some businesses, downsize other operations and see its work more closely aligned with wealth management. Its headcount will be reduced from 18,000 today to 16,000 by the end of 2016.

Set Targets

For 2012-2016, the company says, wealth-management Americas will have yearly targets of 2-4% growth for net new money, 75-78 basis points for gross margin and 80-90% for the cost-to-income ratio. Wealth-management operations in the rest of the world have higher targets of 3-5% for net new money, 95-105 basis points for gross margin and 60-70% for the cost-to-income ratio.

Third-quarter net new money for the U.S.-based wealth-management operations, led by Bob McCann, was 4 billion Swiss francs (or $4.5 billion) compared with 2.6 billion Swiss francs in the second quarter and 0.3 billion Swiss francs a year ago. These figures exclude dividends and interest.

Net new money at UBS Americas wealth-management unit in Q3, including dividends and interest, was $9.5 billion, up 20% from $7.9 billion in Q2 and up 102% from $4.7 billion in Q3'10. At rival Morgan Stanley, these figures were $15.5 billion in Q3'11, $2.9 billion in Q2'11 and $5 billion in Q3'10.

Trading losses

Several months ago, former UBS employee Kweku Adoboli was charged with fraud and false accounting. He is expected to appear in court and enter a plea related to the $2.3 billion of trading losses, which led to the departure of then CEO Oswald Grübel.

On Wednesday, earlier trading losses at the firm’s Africa desk were revealed when the former U.K. head of wealth management challenged a £100,000 ($158,000) fine, according to the Financial Times.

“UBS has already acknowledged that there were weaknesses in certain aspects of WM UK’s control environment,” the company said in a statement to the tribunal … UBS had identified the weaknesses before the regulatory action was taken, and had remediated them by June 2009, as was confirmed by an independent accountancy firm.”

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