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.
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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.”
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By GlobalDataBut 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.
