UBS AG, Switzerland’s biggest bank, will cut about 10,000 jobs and retreat from capital-intensive trading businesses at the investment bank to boost profitability.
The bank plans to save about 3.4 billion Swiss francs ($3.6 billion) in additional annual costs by the end of 2015 as it reduces headcount to about 54,000, Zurich-based UBS said in a statement today. The company will target a return on equity of at least 15 percent starting in 2015, compared with a previous goal of 12 percent to 17 percent.
Chief Executive Officer Sergio Ermotti is overhauling UBS as stricter capital requirements and sluggish client activity hurt profit at the investment bank. UBS will focus more on its wealth management business, the world’s second largest, to boost returns for shareholders.
“This is a very bold move,” Christopher Wheeler, a London-based analyst at Mediobanca SpA, said before today’s release. “It will take time and the execution risk will be high. In the longer term, if it works it will leave a business that is a cash cow.”
UBS rose 7.3 percent to 13.12 francs in Swiss trading yesterday after news reports on the company’s reorganization plans. The stock is up 17 percent this year, compared with a 15 percent gain in the Bloomberg Europe Banks and Financial Services Index, which tracks 38 companies.
The bank posted a net loss of 2.17 billion francs in the third quarter, compared with a profit of 1.02 billion francs a year earlier, after booking a pretax impairment charge of 3.1 billion francs related to goodwill and other non-financial assets associated with the investment bank. Analysts surveyed by Bloomberg estimated UBS would report a 439 million-franc profit.
The reorganization will result in restructuring charges of 3.3 billion francs over the next three years, UBS said. That total includes about 500 million francs in the fourth quarter, which will probably lead to a net loss for the period. Group return on equity will average in the mid-single digits next year and in 2014, the bank said.
Wealth management posted a 32 percent drop in third-quarter pretax profit to 600 million francs and the retail and corporate unit saw earnings decline 40 percent to 409 million francs as the year-earlier figures for the businesses benefited from the sale of assets. Earnings at wealth management Americas jumped 58 percent to 219 million francs and asset management climbed 57 percent to 124 million francs.
The investment bank posted a pretax loss of 2.87 billion francs compared with a 2.1 billion-franc loss a year ago, when it booked a loss from unauthorized trading. Wealth management units attracted 12.3 billion francs in net new funds from clients. The bank’s Basel III common equity ratio rose to 9.3 percent from 8.8 percent in the second quarter.
“It can’t get better than this point for us to act,” Ermotti, 52, told journalists at a briefing. “We have confidence, we have experience and the credentials to do that, and we have a capital base that allows us to do that,” compared with a year ago when the bank announced its last reorganization plans.
UBS will trim risk-weighted assets by about 100 billion francs by the end of 2017 as it shrinks the fixed-income businesses of the investment bank. The bank will cut risk- weighted assets at the fixed-income unit by 80 billion francs from 110 billion francs. Of these, about 30 billion francs will come from credit businesses and 40 billion francs from rates, the bank said.
The investment bank will keep its advisory business, as well as equities, foreign exchange and precious metals units, and will maintain facilitation capabilities in rates and credit. Equity allocated to the unit will drop to 35 percent next year from 65 percent currently.
The investment bank is expected to contribute about 20 percent to the group’s pretax profits in future, the bank said. Wealth management units, retail business and asset management, which will be contributing 80 percent, had annual average pretax earnings of 5 billion francs over the past two years.
Investment-bank co-head Carsten Kengeter will step down from the group’s executive board and take charge of winding down the non-core assets. Andrea Orcel, a 49-year-old former dealmaker at Bank of America Corp. who has co-headed the investment bank with Kengeter, 45, since July, will become the sole head of the unit.
Ermotti said Kengeter has a “very important role” in the revamp and that he has confidence the investment-banker will stay to see his task through. Ermotti declined to say whether the reorganization will result in departures of business heads.
Roberto Hoornweg, who co-leads the firm’s fixed income, currencies and commodities unit with Rajeev Misra, is likely to leave, two people familiar with the matter said yesterday. Misra will probably remain at UBS, the people said. Hoornweg is responsible for foreign exchange, money market and interest-rate sales and trading, as well as commodities and the investment bank’s treasury trading activities.
The details of his departure haven’t yet been finalized, one of the people said. A UBS official in London declined to comment, as did Hoornweg when reached on his mobile phone.
The reorganization is “the most significant step yet for the industry, which could be positive for other players, although we would expect other banks to also re-evaluate their business models,” Credit Suisse Group AG analysts led by Amit Goel said in a note yesterday. “The benefit UBS has over some peers is another more profitable franchise, for Barclays and Deutsche Bank there is less room to maneuver.”
Deutsche Bank AG reported a 3 percent increase in third- quarter net income today, while Barclays Plc publishes earnings on Oct. 31. Credit Suisse said last week it plans to cut costs by an additional 1 billion francs by the end of 2015 after posting a 63 percent drop in net income to 254 million francs, in part because of a 1.05 billion-franc pretax accounting charge related to the bank’s own debt.
The revamp “further strengthens our view on UBS’s ability to pay material dividends,” Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co., said before today’s release. He forecasts the bank may pay a dividend of 65 centimes a share for 2013, implying a dividend yield of 5.3 percent.
UBS, which paid its first cash dividend in five years for 2011, amounting to 10 centimes a share, said it plans in the future to pay out more than 50 percent of earnings to shareholders, depending on its capital needs. The bank aims to achieve the 13 percent Basel III common equity ratio in 2014.
The bank is accruing a dividend for this year and doesn’t rule out making a payout to shareholders even in the likely event of posting an annual loss, Ermotti said. A final decision on the dividend will be made at the end of the year, he added.
Personnel reductions will amount to more than 15 percent of the 63,745 people the bank employed at the end of September. About 2,500 of the job cuts will be in Switzerland, where the company employed more than 23,000 people at the end of last year, and the rest will mainly come from London and the U.S., Ermotti said. UBS is adding to 3,500 global job cuts it announced last year to save 2 billion francs in annual costs.
UBS will cut about 2,000, or 28 percent of about 7,200 front-office staff at the investment bank and will make proportional cuts in the supporting functions, he said. Other divisions won’t see front-office job reductions beyond natural fluctuations, he added.
UBS also plans to make investments totaling 1.5 billion francs over the next three years to help all its businesses compete and gain market share, the bank said. The bank will “forcefully compete in every area” it chooses to be in, Ermotti said, adding that concrete decisions on investments haven’t been made yet.
“This will take the business back to S.G. Warburg’s roots,” said Wheeler. “The question remains the execution risk. Can they keep staff, including Kengeter? What will it cost to retain them and what losses might the unit take?”
Swiss Bank Corp. bought S.G. Warburg & Co., the advisory firm founded by Siegmund Warburg, in 1995, before joining with Union Bank of Switzerland to form UBS in a deal completed in 1998.
Kengeter was appointed to co-lead the investment bank with Alexander Wilmot-Sitwell by former CEO Oswald Gruebel in April 2009, months after he joined from Goldman Sachs Group Inc. at the nadir of the subprime mortgage crisis. Wilmot-Sitwell, 51, has since joined Bank of America.
The investment bank has suffered lapses that shook UBS. Losses during the subprime crisis forced UBS to seek a bailout from the Swiss government in 2008 to help it spin off toxic assets. Last year a $2.3 billion loss from unauthorized trading led to the exit of Gruebel, 68.