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November 20, 2009updated 05 Jun 2017 11:39am

A target too far?

UBS has mapped out its path to strategic reconstruction, based on reaching $14.9 billion in pre-tax earnings annually in three to five years For a bank which last recorded a pre-tax profit back in 2006 and has seen billions of dollars of private client assets flee, it all looks a very close call

By John Evans

UBS has mapped out its path to strategic reconstruction, based on reaching $14.9 billion in pre-tax earnings annually in three to five years. For a bank which last recorded a pre-tax profit back in 2006 and has seen billions of dollars of private client assets flee, it all looks a very close call. John Evans reports.

The grand plan to rebuild UBS and return it to profitability was outlined by chief executive Oswald Grübel and his top team at an investor day in Zurich in mid-November. Apart from the earnings target, the bank set a goal for reaching a return on equity of 15 percent to 20 percent in the same three- to five-year time-span.

After accumulating $50 billion write-offs on toxic debt and a US tax evasion scandal resulting in a hefty fine, a key part of the Grübel game-plan is to restore the reputation of the battered UBS.

“We are building a new UBS,” Grübel, who came out of retirement to join the bank in February after it received a Swiss government bailout, declared.

“One that performs to the highest standards and behaves with integrity and honesty.”

Battered reputation

But UBS’ battered reputation received a new blow last month, after Britain’s Financial Services Authority handed the bank a hefty £8 million ($12.8 million) fine for systems failures that allowed unauthorised trades being made by employees using clients’ money and allocating losses to their accounts.

The trading, at UBS’s London-based wealth management business over a two-year period between January 2006 and December 2007 was only discovered when a whistleblower raised concerns internally. As many as 50 trades a day took place in foreign exchange and precious metals, involving 39 different client accounts.

Grübel meanwhile signalled that much of the planned revival will be based on investment banking, including fixed income, although this was the operation mired in US subprime mortgages which was blamed for bringing UBS to its knees.

But it will be in private banking where ultimately UBS will succeed or fail, say analysts. It remains a global wealth leader, with some $1.7 trillion in client assets. But spooked clients have pulled out a net CHF183 billion ($181 billion) over the 18 months up to the end of September.

In one new hurdle for UBS, the bank estimated that about a quarter of the CHF435 billion of European wealth it manages could be at threat from a series of tax amnesties, ranging from Italy to Britain. UBS said it was confident this could be clawed back through European onshore activities, particularly in Germany and Britain, in Asia and in emerging markets.

In addition, UBS will now particularly focus on attracting the assets of ultra high net worth individuals – those with a $100 million or more of investable assets.

“The UBS turn-around story will only really get traction when the hard facts improve substantially and the key element remains the outflow of client assets,” said Marco Schwender and Martin Koch, analysts at Swiss private bank Wegelin, in a research note.

Grübel gave no firm targets for reversing client withdrawals, indicated it would take time to restore positive net new money growth in wealth management. The hope is that client outflows may reverse sometime in 2010. In the medium-term, UBS plans to attract about 5 percent of total invested assets as net new funds annually at its main wealth management unit.

Juerg Zeltener, head of private banking, told the investor day he was confident that the gross margin on assets can be raised to more than 100 basis points – in line with rivals like Credit Suisse – in the medium term, from the 89 bps which was recorded for the first nine months of 2009.

Robert McCann, the new chief executive of UBS’s Americas wealth management arm, also made a presentation which centred on boosting annual pretax profits at his division to more than CHF1 billion. McCann, who was hired from Bank of America Merrill Lynch where he was formerly the president of global wealth management of Merrill, was critical of the division.

He said: “A culture of execution does not yet exist in this business. I have seen that in the first three weeks. But the business is large enough to be relevant. We can do things for clients that boutiques cannot.”

At the same time, the ‘One Bank’ business model, which encourages cooperation and the flow of client assets through divisions, was officially reinstated by UBS. The bank had disentangled its private banking, asset management and investment banking arms in August 2008 to avoid any conflicts of interest during the financial crisis.

While Credit Suisse and some other wealth majors also pursue a ‘One Bank’ model, the approach remains controversial with its detractors saying that it can encourage abuses like the investment banking side dumping poor investment product onto private banking clients.

Grübel concluded by asking for patience in reaching the various targets, declaring: “The transformation we are undertaking is a fundamental one and it will not happen quickly.”

Joerg De Vries-Hippen, chief investment officer for Europe at Allianz Global Investors, described the UBS targets as “ambitious”. But after three years of turmoil at the bank and only fragile signs of returning confidence, he added, “that is exactly what Grübel needs to be at this point in time”.

Client disclosures

As UBS outlined its new strategy, Swiss government officials detailed the formula for handing UBS client details to the US tax authorities under the terms of a deal thrashed out in August, an accord which saw UBS agree to release the identities of 4,450 American clients.

US clients who hid CHF1 million or more in undeclared assets at UBS between 2001 and 2008 would have their details handed over as could those who had earned an average of at least CHF100,000 in the last three years.

The disclosure threshold is to be lowered to CHF250,000 of assets if evidence of tax fraud could be provided. The first 500 names had already been selected, Swiss officials said.

Despite the upbeat projections at the investor day, Moody’s cut UBS’s ratings on senior debt from Aaa3 to Aaa2, reflecting the challenges the bank faces. The ratings agency cited a loss of client confidence in its wealth management division.

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