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Reading between the lines on what UBS’s announcement means for its investment bank

A “less capital-intensive investment bank” will have people working in much of UBS’s FICC business looking for the exit.

Sergio Ermotti says in the UBS leadership announcement that the bank’s

strategy will be centered on our leading wealth management businesses and our position as the strongest universal bank in Switzerland. A focused, less complex and less capital-intensive Investment Bank and our asset management business are also key elements for growing our wealth management franchise. To credibly serve the needs of our core wealth management clients, these businesses must each be strong and successful in meeting the needs of their corporate, sovereign, and institutional clients. Our industry-leading capital position gives us a significant competitive advantage, particularly during these challenging times."

The message is clear: wealth management comes first. But the comment about a “less capital-intensive investment bank” will have people working in much of UBS’s FICC business looking for the exit. For example, the structured credit business run by Rajeev Misra has been one of the bright spots in revenue terms for the bank. But it requires a lot of capital. Can UBS stick with it?

And while the capital base is important to saying to the world – and mostly to its private banking clients – that UBS as a group is safe, it’s going to make it very hard for the investment bank to generate a return on equity better than its cost of capital. That’s going to put the investment bank as a whole, and in particular the compensation for its staff, under huge pressure. Will UBS be able to keep hold of its top staff?

And talking of top staff, many people continue to be amazed that Carsten Kengeter is still in his job as head of UBS’s investment bank. The people above him have gone; those in the layer below him, whose division housed the rogue trader, have also been pushed aside.

Kengeter is one of the most personable investment bank chiefs in the market, liked by his superiors and his subordinates. That’s not enough to keep him in the job.

Could it be, as one source close to UBS whispers, that Kengeter is a hero at UBS because his swift actions on the bank’s ETF rogue positions prevented losses that could have been as much as four times the $2.3 billion that the bank eventually suffered? 

- Euromoney Skew Blog

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