Under pressure to revive UBS AG's fortunes and help the firm recover from a rogue-trading scandal, the Swiss bank's interim chief is preparing to shrink its once high-flying investment-banking unit.
Sergio P. Ermotti, who has been at the helm for less than a month, has ruled out a sale or spinoff of the investment bank but has decided to significantly reduce its scope and size in order to bolster UBS's focus on its giant wealth management business, according to people familiar with his thinking.
The plans are a U-turn for UBS, Switzerland's largest bank, which spent billions of dollars on acquisitions and investments to build a global investment bank capable of competing with Wall Street's largest firms.
The investment bank soared in the years leading up to the financial crisis, recording large profits in 2005 and 2006 as it ramped up its trading and advisory businesses and took on more risk to boost its returns.
However, many of those bets backfired. The unit suffered huge losses during the financial crisis and slipped behind some of its competitors in many business areas, especially in the U.S.
The brunt of the proposed changes are expected to be felt in parts of the investment bank's fixed-income business, the people familiar with the matter said. UBS's investment bank employed 17,776 people around the world at the end of June, according to regulatory filings. The unit has a large presence in the U.S., where it employs thousands of traders and bankers, largely based in New York and Stamford, Conn., where it boasts one of the world's largest trading floors.
In the summer, UBS announced plans for 3,500 layoffs, with around half of the job losses coming from the investment bank. It is unclear how many additional jobs would be affected by Ermotti's proposed shake-up.
Ermotti, who is considered by many to be the front-runner to become permanent CEO, is likely to announce his plans at an investor meeting Nov. 17.
Ermotti has kept the bank's board apprised of the plans but it is not clear if it has approved them, said people familiar with the matter.
The former deputy chief executive at Italy's Unicredit Group ascended to UBS's top job after the resignation of Oswald Grübel in the wake of news that a London-based trader at the firm's investment bank had lost $2.3 billion through unauthorized trades.
People familiar with the situation said Kweku Adoboli is that trader. British police have charged Adoboli with fraud and false accounting. Adoboli hasn't entered any pleas.
Ermotti has told senior colleagues that UBS's long-held strategy of having two pillars of roughly equal importance—the investment bank and the wealth management unit—is no longer viable.
In his view, UBS must concentrate on the relatively low-risk, high-margin business of selling investment and savings products to its wealthy clients around the world, according to people familiar with the situation.
The strategy being championed by Ermotti is an extension of a shift that had begun under Grübel before the trading scandal, but the events of the past few months and the tough times experienced by investment banks around the world amid widespread economic uncertainty have strengthened the new chief's resolve, said people familiar with his thinking.
As a result, UBS is set to reduce the amount of capital at the investment bank's disposal. At present, the investment bank accounts for around two-thirds of UBS's balance sheet of 1.3 trillion Swiss francs ($1.4 trillion). Ermotti intends to tell investors on Nov. 17 that number will be much lower as more resources are diverted to the wealth management unit, with a focus on Europe, Asia and the U.S., these people said.
A reduction in assets would have ripple effects throughout UBS's investment bank, whose roots date back to the iconic British securities house SG Warburg.
Traders and bankers have already been bracing for job losses and much lower bonuses, and the announcement of Ermotti's plans is likely to deepen those fears.
To be sure, not every part of the investment bank will be hit. In Ermotti's strategy, the slimmed-down unit will focus on helping the wealth management business by selling products to that unit's ultra-rich clients.
It will also continue to work with companies and fund managers in areas such as equities and foreign-exchange trading, capital markets and mergers and acquisition advice.
Last year, UBS began integrating the private and investment banks in order to produce more services and products—such as access to initial public offerings or private equity investments—to appeal to private-banking clients with more than 50 million francs (about $55.4 million) with UBS. That affluent segment is the fastest-growing area of wealth management, particularly in Asia, where many clients are entrepreneurs.
However, the investment bank's fixed income business—a high-octane area that has delivered both huge gains and huge losses for investment banks and contributed to $50 billion in write-downs at UBS in 2007 and 2008—will be significantly scaled back, according to people familiar with the situation.
In July, Grübel announced plans to shrink the division in light of new regulations in Switzerland and elsewhere that have made it tougher to compete. Despite having added hundreds of fixed-income bankers over the past 18 months, the unit failed to meet Grübel's targets. Revenue from the bank's fixed-income, currencies and commodities business was 1.15 billion francs, far from Grübel's target of eight billion francs in annual revenue by about 2013.
The plans represent a bold move for Ermotti, who is vying with internal and external candidates to become the bank's permanent CEO, not least because the wealth-management division has had to overcome its own challenges.
Starting in 2008, UBS became the target of an investigation by U.S. authorities into suspicions that its bankers had helped Americans evade taxes. After a protracted and bruising battle, UBS settled the case in 2009, agreeing to admit to wrongdoing, pay a fine of $780 million and turn over 4,500 names of clients to the U.S. Internal Revenue Service.
That scandal, along with the near collapse of the bank due to the huge securities writedowns by the investment bank, drove hundreds of UBS private bankers to quit and propelled rich clients to withdraw hundreds of millions of Swiss francs from the bank. UBS managed to stem the outflow only late last year.
The moves to scale back the investment bank will fuel questions over the future of Carsten Kengeter, the head of the unit who, until the trading scandal, was seen as a potential candidate for CEO.
UBS declined to make Kengeter available.
This story first appeared in The Wall Street Journal.