UBS Weighing Spinoff of Investment Bank, Mediobanca Says

UBS AG (UBSN), Switzerland’s biggest bank, is considering a spinoff of its investment-banking business as regulators’ demands for more capital thwart efforts to boost returns, according to Mediobanca SpA (MB) analysts.

UBS said in October its target to reach a 15 percent return on equity in 2015 will be delayed by at least one year after the Swiss regulator requested the Zurich-based bank hold more capital for litigation risks. Days later, Switzerland’s finance minister said current leverage ratios are too low and banks may have to consider whether to keep securities businesses.

“We think these events have resulted in UBS dusting off plans, we are sure they have, for disposing of the investment bank,” Mediobanca analysts led by Christopher Wheeler wrote in a note to clients today. He didn’t elaborate on where he got the information and declined to comment beyond his report.

With competitors unlikely to make a bid for the operation, UBS could spin off the unit to existing shareholders and create a London-based firm with stock traded in the U.K., according to Wheeler. UBS may revive the S.G. Warburg brand, the advisory business founded by Siegmund Warburg, said Wheeler, a name that disappeared after the merger between Union Bank of Switzerland and Swiss Bank Corp. in 1998.

Photographer: Gianluca Colla/Bloomberg

UBS said in October its target to reach a 15 percent return on equity in 2015 will be delayed by at least one year after the Swiss regulator requested the Zurich-based bank hold more capital for litigation risks. Close

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Photographer: Gianluca Colla/Bloomberg

UBS said in October its target to reach a 15 percent return on equity in 2015 will be delayed by at least one year after the Swiss regulator requested the Zurich-based bank hold more capital for litigation risks.

‘Good Idea’

The bank has been clear on the strategy and it includes the investment bank, a London-based spokesman for UBS said in an e-mailed statement.

Under current rules, UBS and Credit Suisse Group AG, the country’s second-largest bank, expect they’ll have to hold capital equivalent to 4.2 percent of total assets by 2019 -- more than the Basel Committee on Banking Supervision’s 3 percent minimum. Swiss Finance Minister Eveline Widmer-Schlumpf told Schweiz am Sonntag newspaper in November that a range of 6 percent to 10 percent is being considered.

“A spinoff is a good idea,” said Lutz Roehmeyer, who helps oversee about $13.6 billion at Berlin-based Landesbank Berlin Investment, which owns UBS shares. “I can’t see a scenario in which regulators loosen their grip on banking and, in Switzerland, banks have been punished doubly because of higher capital requirements.”

UBS shares fell 0.2 percent to 18.19 Swiss francs in Zurich, valuing the firm at 69.8 billion francs ($76.8 billion). The shares have gained 16 percent in the past 12 months.

‘Risk Business’

In 2011, a $2.3 billion loss from unauthorized trading at the investment-banking unit led to the exit of former Chief Executive Officer Oswald Gruebel, three years after the bank received a government bailout to ward off a collapse. His successor, Sergio Ermotti, is reorganizing the firm to eliminate 10,000 jobs companywide and exiting most debt-trading businesses while concentrating on money management to boost profitability. The company is the world’s largest wealth manager.

In May, investor Knight Vinke Asset Management LLC called on UBS to spin off the investment bank, describing the operation in an open letter as a “very risky business” which poses a “serious threat.” A spokeswoman for Knight Vinke declined to comment on the report.

A standalone investment bank run by the unit’s current chief, Andrea Orcel, could earn a return on tangible equity of 14.4 percent by 2017, according to Mediobanca. While the smaller UBS would suffer a loss of earnings from the investment bank, it would benefit from a lower risk profile. A spinoff may offer shareholders a 14 percent upside, Wheeler wrote.

Over the longer term, UBS would benefit from an improvement in its credit rating and lower funding costs, Wheeler said.

A disposal would make the new UBS more “stable, safer and with less earnings volatility,” said Roehmeyer. “If 2014 is a good year for capital markets, a spinoff may appear.”

To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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