UBS AG on Thursday provided long-awaited details on its plan to shrink its investment bank by unwinding risky assets and to put more focus on its profitable business of managing the wealth of rich clients.
"We have chosen to substantially reduce the risk profile of the bank by exiting and downsizing businesses which aren't value added to our client franchise or deliver unattractive risk-adjusted returns," the bank's new chief executive, Sergio Ermotti, told investors at a presentation in New York.
The Zurich-based bank's strategy will center on its wealth-management businesses and its position as the strongest universal bank in the Swiss market. To serve wealthy clients, some investment-banking activities are also essential, but they need to be less complex, absorb less capital and be profitable, UBS said.
Detailing its strategy to investors in New York, the Swiss bank also lowered its profit targets, saying it now aims at a return on equity of 12%-17%, compared with 15%-20% previously. UBS also said it plans to pay out a cash dividend of 0.10 Swiss franc for 2011, its first since the onset of the financial crisis.
Shrinking the investment bank involves the elimination of around 2,000 jobs by the end of 2016. This is between 400 and 500 more than previously announced, albeit over a longer period of time and of a size that can be achieved through natural attrition.
UBS plans to rid its balance sheet of 145 billion Swiss francs ($161 billion) by selling or running off risky assets. The biggest cuts come at the investment bank's FICC unit—short for fixed-income, currencies and commodities—which absorbs a disproportionate amount of capital. Among other moves, UBS plans to exit its asset securitization business and will scale back its long-end rates businesses.
These steps will reduce annual revenue by around 500 million Swiss franc, UBS said.
"No personal interest or revenue is more important than the reputation of the bank," Ermotti said, referring to an embarrassing trading scandal that led to top management departures and calls for risk management changes earlier this fall.
Former CEO Oswald Grübel stepped down in late September after the trading scandal. In September, UBS said a London-based trader at the firm's investment bank had lost $2.3 billion through alleged unauthorized trades.
The shedding of risky assets comes ahead of tougher banking rules, known as Basel III. The world's biggest banks, UBS among them, need to hold top quality capital equal to 9.5% of their assets, adjusted for risk. UBS wants to set itself apart from peers by surpassing the regulator's requirement, aiming at 13%.
UBS said it plans to issue non-dilutive, loss-absorbing debt that qualifies ascapital. That's because Swiss rules for the country's two largest banks demand an additional capital buffer, though part of that can come in the form of hybrid capital.
The rules aim at making banks more resilient to financial market turbulence,
forcing them to increase capital to absorb unexpected losses. One solution would be to issue new shares, but banks can also run down risky assets to reduce the amount of capital that is required.
This story first appeared on WSJ.com.Brett Philbin contributed to this article.
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