UBS is cutting 10,000 jobs in its investment bank and is essentially exiting the fixed income business as part of a brutal restructuring to slash costs and refocus on core businesses that include advisory, equities and foreign exchange under Andrea Orcel, who has been appointed chief executive officer of the investment bank.
The restructuring, announced on Tuesday, came as the bank reported a headline net loss of SFr2.2 billion, which included SFr3.1 billion impairment losses related to goodwill and non-financial assets, in third quarter of the year, with profit before tax across its divisions of SFr1.6 billion – beating analysts’ consensus of SFr1.45 billion.
In the investment bank alone, UBS reported a strong set of quarterly numbers, with its fixed income currencies and commodities business generating clean revenues of SFr1.21 billion – up 18% quarter on quarter – while clean equity revenues climbed 8% over the period to SFr787 million. In sum, investment banking revenues rose 3% to SFr339 million, although UBS’s cost income ratio remains particularly high at 88%.
On the restructuring, Sergio Ermotti, group CEO, said in a statement: “The strong progress we have made over the last 12 months allows us to begin implementing this next phase of our strategy. We are ahead of schedule in our plans to build additional capital strength and reduce both costs and risk-weighted assets.”
Under the plans, Ermotti said UBS investment bank will concentrate on the core business areas of advisory, research, equities, FX and precious metals and will exit business lines, predominantly those in fixed income, which have been “rendered uneconomical by changes in regulation and market developments”. According to JPMorgan, the restructuring is mainly related to UBS’ rates and credit businesses.
The investment bank will also be restructured to form two new client businesses: corporate client solutions and investor client solutions.
The first new business includes all advisory and solutions businesses plus execution that involves corporate, financial institutions and sponsor clients, and is expected to generate around “one-third of the investment bank’s revenues and utilize around 15% of its Basel III risk-weighted assets,” UBS said.
The second new business includes execution, distribution and trading for institutional investors, and will provide support to UBS’s wealth management businesses. It comprises UBS’ equities business, FX and precious metals. In flow rates and credit, UBS said that it will maintain “risk facilitation capabilities aligned to its debt capital market and wealth management franchises”, which, as yet, has not been clarified.
UBS expects the investor client services business to generate two-thirds of the investment bank’s revenues and utilize around 85% of its Basel III RWAs.
For Kian Abouhossein, European banks analyst at JPMorgan, the restructuring will result in “SFr80bn additional FICC Basel III RWAs reduction from SFr110bn currently – SFr30bn in credit, SFr40bn in rates and SFr10bn in other areas...SFr10bn reduction in operational risk, leading to target of less than SF70bn IB RWAs by 2013.”
He added: “Clearly this is a material positive – the only negative surprise is the material restructuring charge of SFr3.3bn – however we clearly see this as a one off as UBS becomes a SFr2 per share bank, less IB focus accounting for just 35% of group RWAs post restructuring with ROE target above 15% in line with group – focusing on core money making divisions wealth management, asset management and US WM – i.e. becoming an asset gatherer.”
UBS said the exited businesses and positions will be transferred to, and reported in, a unit called the corporate center from the first quarter of 2013. Carsten Kengeter, former chairman and CEO of UBS investment bank, will oversee a team that will manage the exited businesses and legacy positions. Kengeter will also step down from UBS’s group executive board, and report directly to Ermotti, in his new role.
Ermotti said the bank will make investments totaling “SFr1.5 billion across all of our businesses” and that he believes “the investment bank will continue to be a significant global player in its core businesses, and we intend to forcefully compete to increase our market share in these areas of strength.”