UBS AG, Switzerland’s biggest bank, boosted its profitability goal and announced plans for about 10,000 job cuts as Chief Executive Officer Sergio Ermotti moved to shrink the investment bank and focus on wealth management.
UBS will seek a return on equity, a measure of profitability, of at least 15 percent starting in 2015, compared with a previous goal of 12 percent to 17 percent, the Zurich-based bank said today. It will reduce staff by more than 15 percent to about 54,000 over three years to help save an additional 3.4 billion Swiss francs ($3.6 billion).
Ermotti is overhauling the bank as Swiss capital rules, among the strictest in the world, make it difficult for UBS to compete with firms like Deutsche Bank AG in activities such as fixed-income trading. UBS will retreat from those businesses at the investment bank and rely more on its wealth management unit, the world’s second largest, to boost returns for shareholders.
“They’re admitting that they’re not a bulge-bracket investment bank and will never be, which is sensible considering the new capital requirements,” said Florian Esterer, a fund manager at MainFirst Schweiz AG in Zurich. “UBS is returning to the business model of a classic private bank.”
Bulge-bracket securities firms are those that traditionally arranged the biggest portion of corporate and government financings because of a dominating market presence in sales and trading.
UBS jumped as much as 7 percent in Swiss trading, and was up 5.1 percent to 13.79 francs by 11:51 a.m. That follows a 7.3 percent gain yesterday. The stock is up 23 percent this year, compared with a 16 percent gain in the Bloomberg Europe Banks and Financial Services Index, which tracks 38 companies.
The bank posted a net loss of 2.17 billion francs in the third quarter, compared with a profit of 1.02 billion francs a year earlier, after booking a pretax impairment charge of 3.1 billion francs related to goodwill and other non-financial assets associated with the investment bank. Analysts surveyed by Bloomberg estimated UBS would report a 439 million-franc profit.
Deutsche Bank, Europe’s largest bank by assets, posted a 3 percent increase in third-quarter net income today to 747 million euros ($964 million), helped by a surge in revenue from trading bonds and stocks.
The reorganization at UBS will result in charges of 3.3 billion francs over the next three years. That total includes about 500 million francs in the fourth quarter, which will probably lead to a net loss for the period, UBS said. Return on equity will average in the mid-single digits next year and in 2014, the bank said.
Andrea Orcel, co-CEO of UBS’s investment bank since July, was named sole head of the unit as part of the shakeup. Carsten Kengeter, 45, co-chief with Orcel, 49, will resign from UBS’s executive board and take charge of winding down assets the bank plans to exit.
Ermotti said Kengeter has a “very important role” in the revamp and he has confidence he will stay to see his task through. He will be taking “a few hundred people” from the investment bank with him to work on the wind-down. Ermotti declined to say whether the reorganization will result in departures of business heads.
UBS will trim risk-weighted assets by about 100 billion francs by the end of 2017 as it shrinks the fixed-income businesses of the investment bank. The bank will lower risk-weighted assets at the fixed-income unit by 80 billion francs from 110 billion francs. Of these, about 30 billion francs will come from credit businesses and 40 billion francs from rates, UBS said.
The investment bank will keep its advisory business, as well as equities, foreign exchange and precious metals, and will maintain facilitation capabilities in rates and credit. Equity allocated to the unit will drop to 35 percent next year from 65 percent currently.
UBS is putting about 100 traders at the fixed-income unit in London on special leave today, a person briefed on the plan said. The traders are being sent home on full pay as the consultation process for their departure begins, the person said, asking not to be identified as the details are private.
The employees were informed of the move as they entered their offices this morning, the person said. An official from UBS in London declined to comment.
Total job losses at the investment bank may total “north of 5,000,” Ermotti said today.
After the revamp, the investment bank is expected to contribute about 20 percent to the group’s pretax profits, UBS said. Wealth management, consumer banking and asset management, which will be contributing 80 percent, had annual average pretax earnings of 5 billion francs over the past two years.
“Change is necessary for the entire banking industry,” Ermotti, 52, said in a memo to staff today. “By acting now we are getting ahead of our competitors and reshaping our business so that it can deliver sustainable results over the long term.”
UBS’s investment bank has suffered past lapses that shook the company. Losses during the subprime crisis forced UBS to seek a bailout from the Swiss government in 2008 to help it spin off toxic assets. Last year a $2.3 billion loss from unauthorized trading led to the exit of former CEO Oswald Gruebel, 68.
Wealth management posted a 32 percent drop in pretax profit to 600 million francs in the third quarter, while the retail and corporate unit saw earnings decline 40 percent to 409 million francs. The year-earlier figures for the businesses benefited from the sale of assets. Earnings at wealth management Americas jumped 58 percent to 219 million francs and asset management climbed 57 percent to 124 million francs. Wealth management units attracted 12.3 billion francs in net new funds from clients.
The investment bank posted a pretax loss of 2.87 billion francs compared with a 2.1 billion-franc loss a year ago, when results included a loss from unauthorized trading.
UBS’s Basel III common equity ratio rose to 9.3 percent from 8.8 percent in the second quarter.
The reorganization is “the most significant step yet for the industry, which could be positive for other players, although we would expect other banks to also re-evaluate their business models,” Credit Suisse analysts led by Amit Goel said in a note yesterday. “The benefit UBS has over some peers is another more profitable franchise, for Barclays and Deutsche Bank there is less room to maneuver.”
Barclays Plc, scheduled to publish earnings tomorrow, may say third-quarter pretax profit rose 25 percent as revenue from the fixed-income arm of its securities unit jumped, a Bloomberg survey of analysts showed.
Credit Suisse Group AG said last week it plans to cut costs by an additional 1 billion francs by the end of 2015 after posting a 63 percent drop in net income to 254 million francs, in part because of a 1.05 billion-franc pretax accounting charge related to the bank’s own debt.
The revamp “further strengthens our view on UBS’s ability to pay material dividends,” Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co., said before today’s release. He forecast the bank may pay a dividend of 65 centimes a share for 2013, implying a dividend yield of 5.3 percent.
UBS, which paid its first cash dividend in five years for 2011, amounting to 10 centimes a share, said it plans in the future to pay out more than 50 percent of earnings to shareholders, depending on its capital needs. The bank aims to achieve the 13 percent Basel III common equity ratio in 2014.
“Once we achieve this target, we’ll immediately implement a capital return policy,” Ermotti said.
The bank is accruing a dividend for this year and doesn’t rule out making a payout to shareholders even in the likely event of posting an annual loss, Ermotti said. A final decision on the dividend will be made at the end of the year, he added.
Personnel reductions will amount to more than 15 percent of the 63,745 people the bank employed at the end of September. About 2,500 of the job cuts will be in Switzerland, where the company employed more than 23,000 people at the end of last year, and the rest will mainly come from London and the U.S., Ermotti said. UBS is adding to 3,500 global job cuts it announced last year to save 2 billion francs in annual costs.
UBS will cut about 2,000, or 28 percent, of about 7,200 front-office staff at the investment bank, and will make proportional cuts in the supporting functions, he said. Other divisions won’t see front-office job reductions beyond natural fluctuations, he added.
UBS also plans to make investments totaling 1.5 billion francs over the next three years to help all its businesses compete and gain market share, the bank said. The bank will “forcefully compete in every area” it chooses to be in, Ermotti said, adding that concrete decisions on investments haven’t been made yet.