UBS SLASHES COSTS AS PROFIT SLIDES / THE WALL STREET JOURNAL ( VERY HIGHLY RECOMMENDED READING )

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JULY 26, 2011, 11:46 A.M. ET.

UBS Slashes Costs as Profit Slides

By DEBORAH BALL And KATHARINA BART


ZURICH— Switzerland's UBS AG scaled back ambitions to rebuild its investment bank into a global heavyweight, as group net profit fell by half in the second quarter, dragged down by a sharp drop in its fixed-income business.


UBS, Switzerland's largest bank by assets, said Tuesday it was unlikely to hit a group pretax profit target of 15 billion Swiss francs ($18.61 billion) by 2014, while Chief Executive Oswald Grübel said he was reviewing the future of its fixed-income division in light of tougher regulations that have weighed on its rivals as well.


The decision followed news that group net profit fell to 1.02 billion francs for the three months ended June 30, down from 2.01 billion francs a year earlier. Revenue slumped 22% to 7.17 billion francs.


The investment bank turned a pretax profit of 376 million francs in the second quarter, compared with 1.3 billion in the second quarter of 2010. Revenues from its fixed-income, currencies and commodities business, or FICC—a potentially lucrative but riskier business—were 1.15 billion francs, down from 1.7 billion in the second quarter of 2010.


UBS was one of the banks hardest hit by the financial crisis, when it was forced to write down more than $50 billion in securities and shut large parts of the investment bank's trading division.


After his arrival in February 2009, Mr. Grübel sought to restore UBS's investment bank to its former glory, setting out an ambitious target of 20 billion francs in annual investment-banking revenue by 2014. In particular, he embarked on an aggressive hiring spree with the aim of producing 8 billion francs in annual revenue in the FICC business.


But while Mr. Grübel has succeeded in pulling the investment bank back from the brink—the unit lost 34.4 billion francs in 2008—he has struggled to push it into the top ranks of global banks. UBS has had to contend with Swiss banking regulations that are among the toughest in the world and has suffered an exodus of bankers unhappy with pay packages and skeptical about the strategy for the unit. Swiss regulators, which had to bail out UBS after the 2008 losses, have been watching carefully to make sure UBS's investment bank doesn't take on too much risk in an effort to compete with bigger rivals.


On Tuesday, Mr. Grübel conceded that the new environment is forcing a rethink as to the mission of the trading division, suggesting it may be scaled back to focus more on providing investment products for UBS's large private bank.


"The big question is what size of trading operation do you need to support wealth management and asset management," he told a results presentation. The bank said it will set out its new strategy at an investor day in November.


A revision of the investment-bank strategy "is a concession to reality," said Matthew Czepliewicz, analyst with Collins Stewart. "UBS was late in coming back to the (fixed-income) game and missed most of the wave. Instead, they got saddled with a high cost structure, just as we've seen more challenging markets and more competition. Plus there is the relentless strength of the Swiss franc."


UBS also said it will cut an undisclosed number of jobs as it slashes up to 2 billion francs in costs and retools to respond to a tougher environment. The Zurich-based bank joined the ranks of rivals who have also announced cost cutting in recent weeks. Last week, U.S.-based Goldman Sachs Group Inc. said it planned 1,000 job cuts, while Credit Suisse Group is expected to lay off as many as 1,600 people when it reports the quarter Thursday. UBS didn't elaborate on how many jobs it would cut.


Wall Street firms are tightening their belts as revenue has faltered because of market worries over the euro zone's debt crisis, and as the U.S. deficit and debt-ceiling talks have stumbled. For Swiss banks, the effect is compounded by a strong Swiss franc, which has chipped away at revenue and profit made in other major currencies, such as the dollar and euro.


The dramatic fall in profit and the job cuts overshadowed progress made by UBS's huge private bank, which recently stanched withdrawals from wealthy clients and is showing signs of new strength. The unit posted 5.6 billion francs in net inflows in the quarter, a closely watched indicator of future revenue.
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