Gruebel’s Goal Obsolete as Markets, Capital Crimp UBS Profit

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UBS AG Chief Executive Officer Oswald Gruebel
UBS AG chief executive officer Oswald Gruebel. Photographer: Gianluca Colla/Bloomberg

Oswald Gruebel, chief executive officer of UBS AG, is facing a credibility gap: analysts and investors don’t take his profit target seriously.

The 67-year-old CEO may have to reduce his goal for pretax profit of 15 billion Swiss francs ($18.3 billion) in 2014 by as much as 20 percent, or scrap it, as tougher capital standards and sluggish markets weigh on results, according to analysts’ estimates. The Zurich-based bank may report a 36 percent drop in second-quarter net income tomorrow, analysts estimate.

UBS is in an “intensive process” of assessing the impact of regulatory changes and markets on profits and will probably present the results of the review in November, Chairman Kaspar Villiger said this month. For Gruebel, backing off the forecasts he made in 2009 would suggest he misjudged UBS’s ability to rebound from the biggest loss in Swiss corporate history.

“Getting to 15 billion francs by doing all the right things isn’t going to work,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA. “The regulation has changed, the world has changed, the business mix has changed. Gruebel is a trader and he needs to make a decision on how to change his positioning.”

UBS fell 1.8 percent to 14.05 francs by 10:52 a.m. in Zurich trading, valuing the company at 53.8 billion francs.

The Basel Committee on Banking Supervision proposed stricter capital rules for lenders worldwide last year and the Swiss government, which rescued UBS with a 6 billion-franc capital injection in 2008, came up with additional demands for UBS and Credit Suisse Group AG. This may make some investment-banking businesses unviable at the same time that risk aversion among clients concerned about Europe’s sovereign debt crisis is hurting earnings.

‘Huge Step’

UBS’s investment bank, which piled up 57.1 billion francs in cumulative losses during the three years through 2009, is at the heart of the dilemma over targets. While Gruebel has called earnings performance at the unit, run by Carsten Kengeter, “not yet satisfactory,” he hasn’t scaled back its ambitions.

By cutting the target, “he’d be admitting that UBS isn’t a bulge-bracket investment bank anymore,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “That’s a huge step for them to take. That’s what shareholders want to hear them saying, that’s what the regulator wants to hear them say, I think that’s what the Swiss politicians would be happy to hear them say. The only people that don’t want to say that are the people at UBS.”

No One ‘Believed’

Gruebel came out of retirement two-and-a-half years ago to help repair UBS, after boosting profitability at Zurich-based Credit Suisse in his previous CEO role. Kengeter, 44, joined in December 2008 from Goldman Sachs Group Inc. to help restructure the fixed-income business. He became co-head of the investment bank in 2009, and sole CEO last November. The division aims to almost triple pretax profit to 6 billion francs by 2014 from 2.2 billion francs last year.

UBS declined to make Gruebel available for an interview before the second-quarter earnings report.

Even if markets improve, analysts estimate the bank would make only 11.3 billion francs in 2013 pretax earnings, according to the mean estimate of 18 surveyed by Bloomberg.

“No one has really ever believed in these targets,” said Florian Esterer, who helps manage about $60 billion at Swisscanto Asset Management in Zurich. “The share price has never behaved as if these targets were taken seriously.”

UBS, which jumped 16 percent in Zurich trading on the day the bank named Gruebel CEO, fell 18 percent since he set earnings targets in November 2009 before today. The 46-company Bloomberg Europe Banks and Financial Services Index fell 22 percent in the period.

Hires and Departures

UBS may report tomorrow a drop in second-quarter net income to 1.28 billion francs, according to the mean estimate of 13 analysts surveyed by Bloomberg, from 2.01 billion francs in the year-earlier period. The investment bank may report a 55 percent slump in pretax profit to 590 million francs.

Gruebel and Kengeter have been trying to revive earnings at UBS’s investment bank for two years. They hired more than 1,700 people across the investment bank and brought in new business heads, including Rajeev Misra and Yassine Bouhara, former executives at Deutsche Bank AG, Europe’s biggest investment bank by revenue, to replace people that left or were fired. They’ve increased risk-taking to improve earnings opportunities.

The measures have brought limited benefits. UBS’s share among the nine biggest investment banks of revenue from trading stocks and bonds and advising clients on capital-market transactions and mergers doubled from 2009 to 2010, yet it remained the lowest among competitors.

There have also been departures, including four of the 10 business heads that reported to Kengeter this year.

Gruebel Impact

Slashing earnings targets for the investment bank may have a demoralizing effect on employees, said Esterer.

“What Gruebel says has, of course, a strong effect inside the bank,” Esterer said. “Gruebel said ‘we want to reach this, we want to have an investment bank again.’ If he backtracks now, he’ll have even more problems with retaining people.”

UBS has blamed low client activity for the slow recovery in revenue. The unit’s costs amounted to 81.7 percent of revenue in 2010, the highest among the nine biggest investment banks. That compares with Gruebel’s target of 70 percent for the investment bank and between 65 percent and 70 percent for the group. The CEO said in February he would cut expenses if revenue didn’t increase.

UBS may stick to some targets, such as the cost-income ratio, capitalization levels and return on equity, while abandoning specific profit goals, which are hard to predict given the appreciation of the Swiss franc, said Dirk Hoffmann-Becking, a London-based analyst at Sanford C. Bernstein Ltd.

Job Cuts

“If you focus your guidance on controllable parameters, which you can then manage at least through cost reductions if you can’t get the top line to work, then that’s something the market can build confidence around, in particular when it comes with some action,” Hoffmann-Becking said.

The investment bank, which already cut about 6 percent of jobs in the first quarter, may slash 700 more positions, mostly in the back office, a person familiar with the situation said. The bank may cut about 5,000 jobs across divisions to save 1 billion francs in annual costs, Swiss newspaper Tages-Anzeiger said this month, citing unidentified “insiders.”

Because UBS, like other banks, increased salaries after criticism over bonuses in the aftermath of the credit crisis, it may have to cut as much as 30 percent of staff at the investment bank to readjust to the new environment, MF Global’s Maughan said. The division had 17,628 employees at the end of March.

Pressure Will Build

In 2013, the investment bank may be more than 2 billion francs away from reaching its pretax profit target, while the gaps for the wealth management, wealth management Americas and asset management divisions may be about 800 million francs, 300 million francs and 400 million francs, respectively, according to Wheeler’s estimates.

“It’s all about how long can we wait for the environment to improve and the reality is that UBS can wait less time than everybody else,” Maughan said. “The pressure will just build on them from shareholders.”

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