Hire Wire Nov 18 2011

The Evolution at UBS

By matt turner

It was a case of evolution, rather than revolution, at the Swiss bank yesterday, as UBS set out a restructuring of its investment bank that many thought might go further.

"It certainly does not feel like a year since our last investor day in London," UBS investment banking chief Carsten Kengeter said yesterday, opening his presentation at the bank's investor day. "The world today is a lot more uncertain; the challenges our industry faces are daunting."

Amid an industry-wide decline in revenues and ongoing market volatility, UBS's new chief executive Sergio Ermotti and Kengeter set out the bank's investment bank strategy – with Kengeter describing the plan as "not the start of our journey but its continuation".

Many had thought the bank might go further, however. But it still set out plans to halve risk-weighted assets in the investment bank and to exit certain businesses.

Here we set out the 10 key takeaways from yesterday's event in New York.

The investment bank will be less complex and less capital intensive in future

Chief executive Sergio Ermotti used his opening remarks to focus on the investment bank. He said the investment bank was "a key element of our strategy", but going forward it "has to be more focused, less complex, less capital intensive, and last but not least, consistently profitable.

...and is there to service the wealth management arm first and foremost

But while investment banking may be a "key element" for UBS, Ermotti said the Swiss bank's strategy was centred on its preeminent wealth management business – and the other divisions were there as support.

He said: "In order to serve the needs of our core wealth management clients, our global asset management business and our investment bank must each be strong and successful in meeting the clients' needs of corporates, sovereign, institutional and financial sponsors."

Risk weighted assets in the investment bank will halve by 2016

The bank set out plans to cut Basel III risk weighted assets across at its investment bank, including legacy assets, from around Sfr300bn ($329.5bn) in the third quarter of this year to around Sfr180bn by 2013, and Sfr155bn by 2016, a fall of almost 50%. The majority of this decline will come in FICC.

This will be achieved principally through a mix of "business realignment" and "CVA optimisation"

Kengeter said that RWA reduction would come from from five areas, but the principle two are taking less risk, and minimising CVA charges. He said the reduction would come about by "reprioritising our FICC and equities business, so they take less risk and consumer fewer RWAs, and specific efforts to mitigate the new credit valuation adjustment charges under Basel III. These include investment in advanced risk models and targeted holding strategies built on structures we have already executed."

The bank will exit businesses it considers to be no longer viable…

The bank has pulled out of FICC macro directional trading already, according to Kengeter, and is currently reviewing options, both internally and externally, for its equity prop trading unit. The bank will also exit asset securitisation and complex structured products in FICC.

…and will downsize those which are most capital intensive

Long-end flow rates and global correlation will both see a large decrease in allocated resources, according to UBS, while credit flow in the US, synthetic equities, equity-linked and short-end flow rates will see a small to medium decrease.

It isn't all bad though. Some units will see investment.

Special situations in FICC and commodities will both see an increase in capital allocated, while the bank is look to build on its strength in equities, foreign exchange and advisory. Ermotti said: "Our strategy is not just about reducing and exiting business. We will also build on our strength in for example: advisory, corporate finance, equities, FX, leveraged finance and research. We will continue to invest in products and geographies where we see opportunities for growth. The decisions we are making put our clients' interests first."

Equities and research, in particular, can take some encouragement

Both Ermotti and Kengeter highlighted the bank's huge research platform, with Ermotti saying that "local market investment insight from leading macro-economic and equities research" would continue to be a critical factor in the success of wealth management.

Advisory received praise

Kengeter broke UBS's investment banking strategy into three pillars - flow, solutions, and advisory. He emphasised the latter, saying: "These are high cost, high value services. They underpin much of what we do elsewhere in the investment bank. Unique proprietary insight and analysis is of significant value to our clients. This pillar is a foundation for the other two, and must be monetised by client activity to be viable."

The bank resisted calls to go further in cutting staff

Ermotti said the investment bank will reduce headcount from 18,000 to approximately 16,000 by 2016, which amounts to an additional 400 job cuts on top of those already announced, though these will mostly be achieved through attrition. The target cost to revenue ratio is between 70% and 80%, similar to the 78% in 2010.

No revolution here

UBS may have done enough to appease investors, but this was not so a revolution of the investment bank. Of the 25 units set out in a slide in Kengeter's presentation, only four are being closed, with a further two will see large decreases in allocated resources. The majority - or 60% - will see the same level of resources or additional resources allocated.

This story originally appeared on Financial News.

-- Write to matthew.turner@dowjones.com




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