UBS cuts 10,000 but mostly outside Asia

UBS plans to exit fixed income businesses and cut its headcount by roughly 10,000. It will focus more on its private bank, which is a growth area in Asia.
The Swiss bank insists that others will follow it in exiting costly trading operations (AFP)

One way to officially announce news that you are planning to cut 10,000 jobs is to bury the line in the second page of a press release entitled: “UBS announces strategic acceleration from a position of strength”.

Of course, the market already knew the news — so yesterday when UBS said that it would concentrate on its traditional strengths in advisory, research, equities, FX and precious metals, and exit business lines, predominantly those in fixed income that have been “rendered uneconomical by changes in regulation and market developments”, many in the market were relieved to hear the game plan.

In short, the Zurich-based bank will focus more on its private bank and downsize its investment bank, shedding parts of its trading business, which is where it lost approximately $2.3 billion from an alleged rogue-trading incident last year. Losses in its fixed-income unit during the financial crisis were one reason it had to seek a bailout from the Swiss government in 2008.

As a UBS source said in plain English: “The aim is to be a Basel III compliant bank. Under these constraints it’s difficult for those businesses to be profitable. Other banks will have to follow suit.”

A day earlier, a rival banker said: “We’re certainly going to see more of this, and soon.” Schadenfreude is no more.

UBS said that by 2015 it is likely to have a headcount of around 54,000; the Swiss bank currently employs approximately 64,000. This is in addition to the existing cuts of 3,500 jobs that were announced earlier as a result of the financial crisis of 2008. The latest round of cuts will reportedly be mostly in the UK and the US.

“For Asia, the effect will be de minimis,” said a source. “We’re focusing our investment in regions where we see growth and Asia is clearly one of those. We’ll remain committed to FX, which doesn’t require a lot of capital like trading,” the source added.

Indeed, UBS’s main rival, Credit Suisse, led the way down this path in 2008 when it cut 11% of its workforce and announced it would focus more on its private banking business. On the investment banking front it said it would focus more on flow trading, and scale back its offering of complex products and exit exotic derivatives, collateralised debt obligations and certain proprietary trading and principal trading activities. When Credit Suisse announced that news, there was a collective gasp in the market, as it was a trailblazer. But soon, other banks followed suit — and nearly all have scaled back operations to the tune of 5% to 15%.

We’re now, evidently, in round two.

Current investment bank co-head Carsten Kengeter will step down from UBS’s group executive board to head the unwinding of the investment bank businesses and positions. He will report to group CEO Sergio Ermotti. UBS said in its statement that “the lines of business to be exited will include many that do not meet their cost of capital sustainably or are in areas with high operational complexity or long tail risks likely to weigh on future returns”.

Andrea Orcel will become the chief executive officer of UBS’s investment bank.

The plan is to structure the investment bank so that it has two core legs to its business. Its “corporate client solutions” segment, which includes all advisory and solutions businesses plus execution that involves corporate, financial institutions and sponsor clients, is expected to generate around one-third of the investment bank’s revenues and use around 15% of its Basel III risk-weighted assets.

“Investor client solutions” will be the second segment of the business and includes execution, distribution and trading for institutional investors — importantly, this is the part of the investment bank that will support UBS’s wealth management businesses. Its focus will be on equities, foreign exchange trading and precious metals trading. In flow rates and credit, it will “maintain risk facilitation capabilities aligned to its debt capital markets and wealth management franchises”. Investor clients solutions is expected to generate two-thirds of the investment bank’s revenues and use around 85% of its Basel III risk-weighted assets.

Private banking is the sweet spot for UBS and Asia is where it’s growing. The region’s number of high-net-worth-individuals increased to 3.37 million in 2011, making it home to the largest HNWI population in the world, according to the Asia-Pacific Wealth Report 2012, released in September by Capgemini and RBC Wealth Management.

UBS is targeting total cost savings of SFr5.4 billion ($5.8 billion), including incremental cost savings of SFr3.4 billion above the SFr2 billion cost savings programme announced in August 2011. These changes will take three years to fully implement and UBS is anticipating restructuring charges of SFr3.3 billion during the same period.

“As a result of these actions UBS will be unique in the banking industry — it will be less capital and balance-sheet intensive, highly cashflow generative, more focused on serving its clients and capable of maximising value for its employees and shareholders,” the bank said in its upbeat news release.

“We are ahead of schedule in our plans to build additional capital strength and reduce both costs and risk-weighted assets,” added Ermotti in the statement. “The opportunity we have today to accelerate the transformation of our firm is one that I believe is unique — and one that will allow us to continue to unlock the full potential of our franchise.”

Despite the spin-job headline and upbeat promises of opportunities in the news announcement, Ermotti also struck a considerate note. Near the end of the five-page release, he said: “This decision has been a difficult one, particularly in a business such as ours that is all about its people. Some reductions will result from natural attrition and we will take whatever measures we can to mitigate the overall effect. Throughout the process we will ensure that our people will be supported and treated with care.”

Fine words, but that message was undermined somewhat by reports from London, which noted a particularly callous way of informing staff of their fate — by locking them out of the building. Dozens of bankers and traders apparently got to work yesterday morning only to discover that their entry passes no longer worked. Nice.

Meanwhile, Kweku Adoboli, who worked on the bank’s London-based exchange-traded equities funds desk, has pleaded not guilty to two counts of fraud and four of false accounting with regard to the trades that embarrassed the bank last year. His trial is under way in London and yesterday he told the court that he was not a “rogue trader”.

As UBS rebuilds, it will also have to endure the fallout from its old model.

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