Shareholders win in UBS overhaul

Its job cuts and exit from investment intensive operations will free up more capital

PUBLISHED : Tuesday, 30 October, 2012, 12:00am
UPDATED : Tuesday, 30 October, 2012, 4:25am

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.

UBS intends to split and wind down much of its fixed-income operations, reducing risk-weighted assets by an additional 100 billion Swiss francs (HK$829 billion), said a person with knowledge of the matter who requested anonymity because the plans are private.

The reorganisation stands to help Zurich-based UBS meet its capital requirements faster than it would otherwise.

Chief executive Sergio Ermotti is overhauling the bank as Swiss regulators pressure UBS and Credit Suisse Group 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 JP Morgan Chase. "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 wealthmanagement geared."

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 disclosed for 2016.

As UBS aims for a Basel III common-equity ratio equal to 13 per cent 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.

"I would imagine the stock will fly on Monday," said Christopher Wheeler, a London-based analyst at Mediobanca.

"I think the market will welcome UBS facing up to the reality that it is not a market leader in fixed income," he said.

UBS rose 9.4 per cent in Swiss trading this year to 12.23 francs. UBS's share price is 78 per cent lower than it was five years ago.

The bank's executive board, headed by Ermotti, met in New York last week to consider the reorganisation, 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 this week, 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.