Ermotti, 51, who stepped in after Gruebel, 67, resigned on Sept. 24 following a $2.3 billion loss from unauthorized trading at the bank, had the unanimous backing of the board, Chairman Kaspar Villiger told reporters in Zurich today. Villiger, 70, will step down at the annual shareholders’ meeting in 2012, a year earlier than planned, to accelerate the handover to Axel Weber, 54, the Zurich-based company said in a statement.
The appointments “will bring essential stability and clarity to UBS,” Villiger said in a statement. “It will enable the bank to master the many current economic challenges and regulatory changes facing it.”
Ermotti must oversee a plan, started by Gruebel, to shrink UBS’s investment bank after efforts to rebuild the unit following a record 2008 loss stalled amid stricter regulation and Europe’s debt crisis. The bank’s internal controls came under scrutiny in September after Kweku Adoboli, a trader on the exchange-traded funds desk in London, was arrested for allegedly racking up $2.3 billion in unauthorized trading losses.
Proof of Pudding
“The proof of the pudding will undoubtedly be in the eating as far as he’s concerned,” said Wheeler, who has an “underperform” rating on UBS. “He’s neither fish nor fowl. He’s not a high-profile outside hire with a very definitive and visible track record. And he’s not a long-term staffer who knows the inside and out of the firm very well.”
UBS fell as much as 3.6 percent and was down 2.8 percent at 10.64 Swiss francs as of 2:30 p.m. in Zurich trading. The stock has gained 5 percent since Ermotti replaced Gruebel, making it the 18th-best performer on the 46-company Bloomberg Europe Banks and Financial Services Index, which rose 4.2 percent in the period.
Gruebel, who came to UBS with the moniker “Saint Ossie” after helping to restore profit at rival Credit Suisse Group AG, hired Ermotti after he resigned from UniCredit SpA (UCG), Italy’s biggest bank. Ermotti, who had lost out to Roberto Nicastro for the role of general manager, the second-highest executive position at UniCredit, joined UBS on April 1 as CEO and chairman of Europe, Middle East and Africa.
Ermotti “has a lot of top qualities for this kind of job,” Villiger said in an interview, adding that his Swiss nationality was a bonus. “To have someone who speaks our three main languages and who understands the country, despite having spent a long time in other countries, was an add-on that was really important.”
Ermotti’s compensation package hasn’t been fixed, Villiger said, adding that he can probably continue on the current salary of 2.5 million francs while bonuses will be decided early next year.
Ermotti was probably the board’s “plan B” all along in case Gruebel became unavailable to lead UBS, said John Purcell, founder of executive search firm Purcell & Co. in London. The two-month search was probably just aimed at satisfying investors, he said.
“We need today managers who can deal with complexity,” said Villiger, commenting on Ermotti, who was in charge of three different businesses at UniCredit. Weber also fully supported Ermotti’s appointment as CEO, Villiger said.
Weber is due to join UBS as an adviser in February and has been nominated for election to the board of directors at the shareholders’ meeting on May 3. Weber, who was a frontrunner to succeed Jean-Claude Trichet as president of the European Central Bank until he stepped down from his post at Germany’s Bundesbank, was also considered a candidate to succeed Deutsche Bank AG CEO Josef Ackermann. Under the original plan, he was due to become vice chairman in 2012 and take over from Villiger the following year.
Ermotti has met Weber previously when he worked at UniCredit and at international conferences such as the World Economic Forum in Davos.
“We have now a team that doesn’t need to fear the competition,” Villiger said.
The management style of Ermotti, who was born in the Italian-speaking part of Switzerland and has a passion for soccer, may contrast with that of Gruebel, who was criticized by Swiss politicians for his blunt comments. Ermotti, who has moved to Zug, a canton near Zurich with one of Switzerland’s lowest tax rates, from his hometown of Lugano, told television channel RSI in an interview aired Nov. 6 that it’s important for him to spend weekends with his wife and two sons.
“He’s also good with clients,” said Villiger. “He has charisma.”
Ermotti said today he sees himself as a team player and likes to have people around him with “complementary” knowledge and experience. “No single person can do everything alone,” he said. He declined to “speculate” on the future of Carsten Kengeter, head of UBS’s investment bank, who will be presenting his unit’s strategy this week in New York.
At UniCredit, where Ermotti started in December 2005 as the head of the markets and investment banking division, he wanted to compete with the world’s top securities firms. His 2006 strategy of building up fixed-income, structured credit and structured finance businesses initially boosted earnings. Two years later, the subprime crisis forced Ermotti to retreat to UniCredit’s home markets and reduce risk-taking by scaling down proprietary trading, structured credit carry trades and global fixed income.
With corporate banking added to his responsibilities, Ermotti’s target was to boost returns at the combined division. The corporate and investment banking business’s goal for risk- adjusted return on risk-adjusted capital, a measure that represents the value created per unit of risk taken, was to reach 11.5 percent in 2010 compared with 6.5 percent in 2007. That return was a negative 1.3 percent last year.
UBS also wants to boost the return on equity of its investment bank by reducing risk-taking and scaling down the fixed-income business that holds the most risk-weighted assets. The bank, which has already started implementing the new strategy, will seek to balance risks and returns, Ermotti said today.
“No profit is worth more than the bank’s reputation,” he said.
UBS’s strategy “will be centered on our leading wealth management businesses and our position as the strongest universal bank in Switzerland,” Ermotti said. “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.”
Bank of America Corp. (BAC) and Morgan Stanley leapfrogged UBS in wealth management during the credit crisis as competitors grew through acquisitions, while UBS customers withdrew funds, spooked by record writedowns and a U.S. probe into whether the bank helped American clients evade taxes. Apart from reorganizing the investment bank, UBS needs to invest in wealth management, which is its “brand and asset,” Villiger said.
UBS may be able to boost the securities unit’s return on equity to 17 percent by 2013 by cutting staff and through scaling down risk-weighted assets by about 70 billion Swiss francs ($77 billion) on top of the 100 billion-franc downsizing UBS had already announced to prepare for new Basel III rules, JPMorgan Chase & Co. analyst Kian Abouhossein estimated. Without such a reorganization, the unit’s ROE may fall as low as 7 percent that year, according to his estimates.
As UBS refocuses on wealth management, appointing another investment banker as CEO isn’t the ideal choice, said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. Ermotti’s Swiss nationality and international banking experience with UniCredit and during 16 years at Merrill Lynch & Co. probably convinced the board, he said.
Ermotti was also in charge of private banking at UniCredit, which had 139.7 billion euros ($190.7 billion) of client assets at the end of last year. That’s less than an eighth of UBS’s 1.46 trillion francs in wealth management units’ invested assets for the same period. He had aimed to boost customers’ financial assets to 198 billion euros in 2010.
Ermotti’s appointment “is not a reason to get particularly bullish for the stock, but he can probably get the job done,” said Becker, who has a “hold” rating on UBS. “Holding such an important investor day with an interim CEO wouldn’t have been great either.”
Ermotti, who described himself as a “lazy” student in the RSI television interview, started his banking career at 15 years old with an apprenticeship at Corner Banca SA in Lugano. His first assignment was in the markets division, which was “hectic” and appealed to him, Ermotti told Swiss tabloid SonntagsBlick in an interview last month. He later completed an advanced management program at Oxford University.
“I never would’ve thought I’d arrive where I am today,” Ermotti told RSI. “What has brought me further is that I’ve never had the goal of becoming the number one.”
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