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Investment banking: The upside of downsizing

Regulators want banks to shrink their investment banking activity and, by introducing rules that make much of it uneconomic, have got shareholders onside. Banks now need to get the business mix of their corporate and investment banking arms right, and get the size of these divisions right. Maybe then they can work out where to invest and even grow. Outside the top tier of investment banks, there’s plenty of reinvention going on.

The partial re-rating of shares in UBS in November, following the announcement of substantial cuts to the fixed-income, currency and commodities arm of its investment bank, sends a stark message to managements of other financial institutions. UBS is cutting the size of its investment bank by two-thirds, with equity capital allocated to investment banking set to fall to just SFr7 billion ($7.4 billion) by 2015, down from SFr22 billion in the third quarter of 2012. Risk-weighted assets will also decline substantially, although some of these are now shunted off to a more swollen corporate centre division to be worked down. The bank’s funded balance sheet will fall by 30% over the next three years.

From dominating the UBS group today, and risking damage to its wealth management brand through reputational and regulatory snafus as well as a stream of grim updates on loss of market share, constrained margins and higher regulatory capital charges, investment banking in future will provide only about 13% of UBS’s profits. Retail and corporate banking, mainly in Switzerland, will provide a higher share at around 22%, with the rest, fully 65%, coming from its signature businesses of wealth and asset management .

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