UBS AG, Switzerland’s biggest bank, set a target for profitability, announced its first cash dividend in five years and said it will shrink the investment bank to concentrate on wealth management.
UBS will aim for a return on equity of between 12 percent and 17 percent starting in 2013 and plans a dividend of 10 centimes a share for this year, the Zurich-based bank said yesterday as top executives spoke to investors in New York.
Chief Executive Officer Sergio Ermotti, who took over from Oswald Gruebel following a $2.3 billion loss from unauthorized trading in September, is scaling down fixed-income businesses as stricter capital rules and Europe’s sovereign debt crisis hurt profit. UBS plans to cut risk-weighted assets at the investment bank by 145 billion Swiss francs ($158 billion), or almost half, by 2016 under Basel III rules.
The reorganization and restarting dividend payments “should reassure the market somewhat,” said Huw van Steenis, a Morgan Stanley analyst in London. “But we should not underestimate the challenge for UBS to deliver on these targets whilst deleveraging without discounting the assets too much.”
UBS rose 6 centimes, or 0.6 percent, to 10.55 Swiss francs by 9:59 a.m. in Zurich. The stock has declined 31 percent this year, compared with a 36 percent decline in the 46-company Bloomberg Europe Banks and Financial Services Index.
‘Painful’ for Banks
Ermotti, who joined the bank in April and became interim CEO after Gruebel quit, was confirmed in that role on Nov. 15.
“We have chosen to substantially reduce the risk profile of the bank,” Ermotti, 51, said yesterday. “We will continue to invest in products and geographies where we see opportunities to grow, particularly in our wealth management businesses.”
The investment bank will shrink its long-term rates business, almost halving the risk-weighted assets of the macro unit, which also includes foreign-exchange trading. Assets at the credit and emerging markets businesses will be cut by about a quarter each by 2016, while so-called legacy assets, such as auction-rate securities, will be exited.
The investment bank will also get out of asset securitization, complex structured products, macro-directional trading and equity proprietary trading, slides from the presentation of investment-banking chief Carsten Kengeter showed. The bank wants to expand its commodities business and the special situations group, and build on its strengths in equities, foreign exchange, capital markets and advisory businesses, Kengeter said.
The investment bank will aim for headcount of about 16,000 in the future, Ermotti said. The reduction from 17,878 at the end of September will be achieved through the about 1,600 job cuts announced in August, and as the bank exits or scales back businesses and through attrition, he said.
UBS will expand in wealth management, targeting an increase in client advisers to 4,700 from 4,252 at the end of September. UBS adjusted its expectations for earnings and new assets as the economic slowdown makes its wealthy clients more risk averse.
Margins, New Money
The goal for gross margins, or the amount of revenue the bank makes on assets under management, was changed to between 95 basis points and 105 basis points from an earlier target of more than 100. A basis point is a hundredth of a percentage point.
UBS aims to attract net new money of between 3 percent and 5 percent of assets under management annually, compared with about 5 percent previously.
UBS’s wealth management Americas business, which is run by Robert McCann and includes the former Paine Webber Inc., is not up for sale, Ermotti said. McCann, in his presentation, said wealth management Americas can achieve the $1 billion pretax profit it set as a target two years ago.
The return on equity target compares with an ROE of 10.7 percent during the first nine months of 2011, on an annualized basis, and a goal of 15 percent to 20 percent announced two years ago.
UBS, which abandoned its previous profit goals in July, isn’t alone in cutting targets and shrinking its securities arm. Zurich-based Credit Suisse Group AG, Switzerland’s second-largest bank, said earlier this month it will eliminate about 1,500 positions, in addition to 2,000 announced in July, and trim risk-weighted assets by 110 billion francs, including almost 100 billion francs at the fixed-income unit, by the end of 2014.
Credit Suisse cut its return-on-equity goal in February to more than 15 percent from more than 18 percent previously, citing stricter regulation and challenging markets. Barclays Plc set an ROE target in February of 13 percent for 2013, down from an average of 18 percent over the past 30 years.
“Everybody is doing the same thing” because Basel III rules are hard on investment banks, said Christopher Wheeler, a London-based analyst at Mediobanca SpA. “It’s a massively complex execution of getting out of businesses without damaging the franchise that you want to keep, keeping up the morale of people, avoiding losses on the rundown of the books. It’s going to be very tricky indeed.”
The shift in strategy coincides with another round of management upheaval at UBS, which was ravaged by more than $57 billion of credit-related losses during the financial crisis of 2008. Wheeler cut his rating on UBS to “underperform” from “outperform” after the September departure of Gruebel, 67. Chairman Kaspar Villiger is leaving in 2012, a year earlier than planned, to make way for former Bundesbank President Axel Weber in the role.
Tom Naratil became chief financial officer in June, replacing John Cryan, after serving as CFO and chief risk officer of UBS’s wealth management Americas unit. Maureen Miskovic, a former risk officer at Boston-based State Street Corp. and Lehman Brothers Holdings Inc. of New York, took over as group chief risk officer in January.
“It’s hard for anyone to make it in investment banking at the moment,” said Matthew Clark, a London-based analyst at Keefe, Bruyette & Woods Ltd. “The question is in execution. The ingredients are all there, but the manager that was entrusted to deliver that story is no longer there, so we really need to see how the new guy does.”