UBS Expects Slow Transformation of Its Investment Bank

on Nov 22, 2012

Three to five years is what it would take UBS (NYSE:UBS) to fully transform its investment banking business. That’s what Andrea Orcel, CEO, told staff at a meeting according to two anonymous sources quoted by Bloomberg.

**UBS’ Exit from Fixed-Income Business**
At the end of October the Zurich-based bank announced it is scratching its fixed income trading business and instead concentrating on equities trading, foreign exchange and advisory roles. The split was meant to deliver yet another reduction of risk-weighted assets of up to $107 billion (£67 billion) and bring the bank closer to meeting the new Basel III banking regulations. But the restructuring process will also see 10,000 people or a total of 16 percent of the bank’s workforce unemployed by 2015. Many employees received calls just a day after superstorm Sandy passed through New York warning them not to come to work as their ID cards have been disabled and email accounts cancelled.

The massive overhaul of the bank has resulted in a 16.16 percent increase in the share price, which is currently at $15.38. Most investors have approved the decision to exit the fixed-income business, barely contributing to the bottom line yet accumulating large costs, and concentrate on advising and equities trading. According to Dominic Elliott, Reuters Breakingviews columnist, UBS could possibly emerge “as a kind of mega-boutique with an advisory and finance franchise serving corporate clients, piggybacking off an equities business focused on investment clients”. The process is expected to be long and painful though as Mr Orcel pointed out in the staff meeting. “Our course of direction is clear,” he said in a memo to employees from 5 November “It is now time to move forward with a future-focused investment bank that responds to industry, regulatory and economic realities and fits firmly with UBS’s ambitions.”

The bank has ambitions to be a market leader in Europe, while the Asia-Pacific region is seen as a “second home market” where UBS will be highly competitive. In the Americas the company will not try to compete on all levels with US banks but rather employ a selective strategy and target certain markets.
**The Revamp of the Financial Industry**
Cost cuts and reductions in risk-weighted assets due to the changing regulatory landscape have caused a shift in investment banking, which analysts consider to be structural as opposed to cyclical. “By the time we are finished with the unintended consequences of regulation, my feeling is we will have five to six [global] banks remaining,” said Anshu Jain, Deutsche Bank’s chief executive, on Wednesday as quoted by Reuters.

!m[The Financial Industry Shifts Burdened By Regulations –Winners and Losers Yet to Be Determined](/uploads/story/880/thumbs/pic1_inline.png)Most forecasts show Goldman Sachs and JPMorgan staying on top of the investment banking pyramid with Merill Lynch, Morgan Stanley, Bank of America and Citi also assuming major roles. In European markets, Barclays Capital and Deutsche Bank are expected to be the industry’s leaders.

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Banks such as UBS, Credit Suisse, BNP Paribas and HSBC are likely to be seen as second tier along with RBS, RBC, Societe Generale and Nomura.
The top five banks are the ones expected to reap the highest profits, while the second tier companies will have to rely on cost cuts to get above an average cost of equity of 10-12 percent.
One thing is certain – there is little to no chance of banks ever going back to the years before the financial crisis when return on equity topped 20 percent. The main question in investors’ heads right now is whether drastic overhauls of the banks’ structures, such as the ones carried out by UBS and most recently by Credit Suisse, will turn out to be the correct strategy in the long term.

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