INVESTMENT BANKING : GAME OVER / THE ECONOMIST

Investment banking
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Game over
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UBS swings the axe
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Nov 3rd 2012
BERLIN

     

THEY had no chance even to clear their desks. Scores of London traders who had gone into work for UBS, a Swiss universal bank, on Monday this week were abruptly barred entry to their offices on Tuesday. Others will soon follow them out of the door: the bank this week announced it would be cutting 10,000 jobs in its investment bank by 2015. The bank will concentrate on its core strengths: wealth management, Swiss retail customers, and still-appealing bits of investment banking like foreign exchange and equities trading. Other investment-banking activities—in its fixed-income businesses, in particular—will be housed in a non-core unit and gradually wound down.




UBS is not the only bank to be scaling back its ambitions; almost all big European banks are doing so in one way or another. But the Swiss bank has chosen to “undress in public”, says one analyst. Its promise to start paying at least 50% of its profits in dividends, after it reaches a certain ratio of capital to assets, helped lift UBS shares by 4% on the day of the cull.




Investment banks have had their fair share of foul-ups in recent years, but UBS has been particularly accident-prone. The division has produced meagre profits since losing close to SFr60 billion ($54 billion) from 2007 to 2009. It took a huge hit on subprime mortgage-backed securities, prompting the Swiss government to inject capital. It suffered heavy losses in the botched Facebook listing earlier this year. Only this week a tearful junior trader took the stand in a London courtroom to defend himself against charges that he lost the bank SFr1.8 billion in rogue trading. As long ago as 2010 Philipp Hildebrand, the then governor of the Swiss central bank, very publicly raised doubts that UBS, and its big Swiss rival Credit Suisse, could succeed in full-service investment banking and urged them to concentrate on their strengths.

 

 

 

It has taken time for that message to sink in, but pressure inside and outside the bank helped. Axel Weber, the chairman of UBS since May and a former president of the German Bundesbank, “is bleak and leery about the world,” comments a UBS-watcher. Above all, the requirements of Finma, the Swiss regulator, which has imposed extra charges on the two Swiss banks that are “too big to fail”, have made it harder to hit targets for returns.




Credit Suisse is cutting, too. It plans cost savings of SFr4 billion by the end of 2015 and a reduction in risk-weighted assets (RWAs) of $24 billion by the end of 2013, it said on October 25th. But UBS is going much further, getting out of businesses that attract high capital charges and where it is subscale. The economics of fixed-income trading are becoming increasingly hard to sustain without operating on an industrial scale. UBS no longer plays in the big league occupied by JPMorgan Chase, Barclays and Deutsche Bank: last quarter UBS made less than half of the profits averaged by the top five fixed-income players.
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The question remains whether UBS can meet even its scaled-down goals. It wants to achieve at least a 15% return on equity in the slimmer investment-banking division by next year; only one or two big investment banks are achieving that today. It hopes to improve overall profitability by cutting its RWAs by SFr80 billion, and winning a “rebate” of 1.5 percentage points on the extra capital that Swiss regulators demand from the big banks. The danger is that this is done more by smoke and mirrors than real risk reduction. Risk weightings partly depend on models applied by the banks themselves. UBS managed to reduce its RWAs in the third quarter by SFr8 billion, of which 15% was due to changes in its risk model. On the other side of the balance-sheet, managers can determine how to attribute capital to group businesses to determine their return on equity.





Luckily, the bank does still have one of the world’s greatest wealth-management franchises. It can afford to subordinate investment banking to its wealth-management customers and the odd corporate client. Analysts at Morgan Stanley reckon that UBS could earn SFr4.3 billion after tax from wealth management and retail banking next year—a juicy 30% return on equity. With that kind of fallback, who needs a big investment bank?