The market had expected the worst from the first part of the results of the giant Swiss financial bank UBS (Union of Swiss Banks, UBS), the European bank most affected by the US sub-prime crisis. However, when those numbers were announced on August 12, Chairman and CEO Marcel Rohner and the rest of the administration had more than one trick up their sleeves to make up for one of the worst 12 months in the world. banking history.
That doesn’t mean the results weren’t bad. The bank announced a net loss of $329 million in the second quarter after acquiring 5.1% net profit at the same time last year. UBS added an additional loss of $5.1 billion in its earnings announcement, bringing total debt provisions relating to the credit crunch to a stagnant $43 billion.
More worryingly for UBS, which owns the world’s largest wealth management firm, wealthy clients withdrew $40.3 billion from the bank’s coffers during the second quarter. This compares to $31 billion in net deposits during the same period in 2007, heightening fear among UBS bankers that their institution’s exposure to sub-prime credits will impact UBS as a as managing bank of riches.
A TRIPARTITE STRUCTURE
So, what did Rohner and his colleagues reveal to combat the weak numbers in the first part of UBS’s result and also to dispel accusations that the bank manipulated the American market for floating rate securities ( read the article published on 30/07/08 on BusinessWeek)? In an attempt not to repeat its previously adapted strategy, the three divisions of the bank – private banking, investment banking and asset management – will be reorganized into separate entities within the Swiss financial giant. Each of these branches will be given more autonomy when managing their operations, and bonuses will now be tied more directly to the performance of each unit. This is a change from before, when the poorly performing investment banking unit sank the ambitious wealth management division to the bottom.
“This is a clear indication that the universal banking model has clearly not worked for UBS,” says Bob McDowall, director of European research for financial services consultancy Tower Group. Previously, UBS had intertwined its business units so that assets could be shared between different departments. Mc Dowall adds: ‘The way the bank is now organized is a semi-step towards the sale of subdivisions of the business.’
Indeed, rumors swirled that UBS was winding down its investment banking division after the company suffered toxic debt (read the article published on 1/10/07 on BusinessWekk.com ), when credit markets imploded last year. So far, the company’s newly elected chairman, Peter Kurer, has categorically denied any expectation of bringing transformations to the company’s divisions. However, when pressured by investors to speak out, he said: ‘We haven’t received any formal offers that come close to capturing dividends.’
LOWER IMPORTANCE GIVEN TO INVESTMENT BANKING
Despite these denials, analysts can’t help but marvel at what the impact will be when the banking divisions gain greater independence. According to research at Citigroup (C), UBS’s wealth and asset management operations will generate 62% of its full-year 2009 revenue, compared to 68% earned from investment banking. On August 12, UBS also said it would focus on wealth management, announcing it as the main resource for its growth, while reducing the size of its investment banking unit.
‘It is likely that the divisional separation will cause speculation (about a possible sale of the investment banking unit),’ Keefe shareholders Bruyette said in a research note to their clients. & Woods (KWB) based in London. Analysts added that no sale would be possible until the division gains full independence by the end of 2009.
Along with preparing for the future of its investment banking division, the investors are concerned regarding the increase in cash withdrawals from the Wealth Management Unit coffers. A succession of clearly visible blunders, including the dismissal of several former and current USB employees (read the article published on 05/23/08 on BusinessWeek.com) due to tax evasion in the United States, has brought many wealthy customers to slam the door. Marco Suter, USB’s chief financial officer, told investors on August 12 that the outflows were ‘disappointing but not surprising’. He added: ‘Issues surrounding our reputation are having a growing impact on the global wealth management industry.’
Others are less intransigent. ‘It’s the withdrawals from the wealth management business that bother the Swiss the most. For most of them, the power of UBS is a sign of the fertility of their country’, relates McDowall of the company Tower Group.
For the near future, the power of the Swiss financial giant will continue to be deplorable after Rohner announced that he had no ‘expected no improvement in the current adverse economic and financial market trends’ during the first half of 2008. While UBS reduced its exposure to risky assets by $27 billion during the second quarter, the bank another 50 billion dollars anchored in serious debts, mainly in the United States.
To make up for the losses, the bank has previously turned to shareholders for more money, including the Singapore government and an anonymous Middle Eastern investor who injected $11.5 billion (read the article that appeared 12/10/07 on BusinessWeek.com) late last year. If the bank’s financial health does not improve soon, analysts fear that shareholders may be reluctant to inject additional cash.
After being hit by multibillion-dollar losses from sub-prime assets in the United States, the UBS administration can only hope that its units’ acquisition of a larger economy will spark the flexibility needed to navigate the waters. troubled economy. ‘We are not done with our work, admits Rohner, CEO of UBS. But we have taken steps to tackle the unfinished business’.