Gruebel Tops Goldman With `Don't Lose Any Money' Mantra at UBS

UBS AG went from last to third in equity sales and trading revenue in the latest quarter among the world’s largest investment banks, passing Goldman Sachs Group Inc. and JPMorgan Chase & Co. along the way.

Chief Executive Officer Oswald Gruebel attributed the improvement at UBS’s investment bank to prudence, and praised the people who “take risk, evaluate and manage it.” A rebound at the unit helped UBS earn 2.01 billion Swiss francs ($1.9 billion) in the quarter, the Zurich-based bank said yesterday, surpassing the estimate of analysts by almost 80 percent.

Gruebel, who led a turnaround at Credit Suisse Group AG earlier this decade, joined UBS in February of last year after more than $50 billion of credit losses and writedowns during the subprime crisis. He has hired more than 850 people to rebuild the bank’s debt and equity units, and appointed Carsten Kengeter, formerly of Goldman Sachs, to co-head the investment bank with Alexander Wilmot-Sitwell.

“The results speak for themselves,” said Dirk Hoffmann- Becking, a London-based analyst at Sanford C. Bernstein. “UBS has become a lot better at hedging its bets. They hear the alarm bells quicker and react quicker.”

UBS’s share of equity trading revenue rose to 14 percent in the second quarter from 9.8 percent in the first, company reports show. Only Credit Suisse of Zurich and New York-based Morgan Stanley took a bigger share.

Hedging Volatility

UBS decided in May to hedge its positions on equity options sold to clients, anticipating a jump in volatility that occurred after a May 6 market plunge temporarily erased $862 billion in value from U.S. equities in less than 20 minutes. Goldman Sachs, which saw its equities revenue fall by almost half in the second quarter from the first, said last week that part of the drop was due to the firm’s equity derivatives division not hedging its short position on volatility fast enough.

“We thought in May that we better cover it and we covered it,” UBS Chief Financial Officer John Cryan, 49, said on a conference call with reporters and analysts yesterday. “It wasn’t a trade that was intended to make money. It was a trade that was intended to avoid the risk that we lost money.”

While new hires, revamped management and better morale have helped improve the bank’s results, so has an increased aversion to risk, said Cryan. UBS cut risk-weighted assets at the securities unit by 45 percent since the beginning of 2008. Gruebel and Kengeter, 43, monitor traders’ positions, he said.

‘Biggest Casualties’

“Carsten is on top of all of the risks, every day risk calls, talking to traders,” said Cryan. “And that didn’t happen during the past four or five years before he joined.”

While too much prudence can come at a cost in terms of future earnings, “we’re far away from that being a major issue at UBS,” said Hoffmann-Becking.

Gruebel, 66, who was hired out of retirement to revive UBS, skipped college and started his career as a trainee at Deutsche Bank AG in 1961. He joined Credit Suisse in 1970, rising through the ranks from its Eurobond trading desk. He doubled the bank’s earnings and share price in the three years after taking over as sole CEO in 2004.

UBS shares climbed 11 percent in Swiss trading yesterday, and have risen 73 percent since Gruebel took over in February of 2009, following a state rescue.

“UBS has been one of the biggest casualties of the financial crisis so there was an awful lot of work to be done to restructure the business,” said Henk Potts, who helps oversee about $235 billion at Barclays Stockbrokers Ltd. in London. “Perhaps we’re seeing a light at the end of a very long and dark tunnel.”

Equities Leadership

UBS changed management of the equities trading unit after Daniel Coleman, an almost 24-year veteran, stepped down in March. The bank appointed Matt Rule, Dominic Vail and Joe Oertel in April to head equity sales in Asia, Europe and the Americas, respectively. It hired Axel Kilian from Nomura Holdings Inc. to run equity derivatives distribution, and in May named Yassine Bouhara, formerly with Deutsche Bank, and Francois Gouws to head the global equities business, succeeding Coleman.

Those changes followed a revamp of UBS’s debt trading business, which is now “nearly completed,” according to Gruebel. UBS in January named Rajeev Misra and Dimitri Psyllidis, formerly with Deutsche Bank and Merrill Lynch & Co., respectively, as co-heads of fixed-income, currencies and commodities.

Strategy Working

The company hired Neal Shear as global head of securities and Roberto Hoornweg as the global head of securities distribution, both formerly with Morgan Stanley, to align the equities and debt units and bring their sales teams closer together.

UBS beat analysts’ estimates on debt trading revenue, which fell 21 percent in the second quarter to 1.7 billion francs from the first three months. The drop was smaller than the average of 38 percent at its seven rivals, according to company reports.

“Gruebel’s strategy has worked out,” said Dirk Becker, a Frankfurt-based banking analyst at Kepler Capital Markets. “It looked for awhile like UBS may have over-hired, but in the second quarter we saw that the hires did bring in revenue.”

Although the bank’s 10 percent decline in trading revenue in the second quarter from the first was less than the average 35 percent drop reported by its seven competitors, its total sales and trading revenue so far this year is the lowest.

Gruebel isn’t satisfied. The equities unit still has “to do a lot of catching up,” he told reporters yesterday, while the debt business of a bank the size of UBS should be making 4 billion francs in revenue each quarter, double the target he set for it in November.

Gruebel said his message to traders now is similar to what it was a year ago, when the bank just wanted to avoid losing money: “Still don’t lose any money, but do more.”

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

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