UBS AG Chief Executive Officer Sergio Ermotti dismissed speculation that Switzerland’s biggest bank will spin off its investment-banking business to meet regulators’ demands for holding more capital.
“We are not considering that option,” Ermotti, 53, said in an interview with Stephen Engle on Bloomberg Television in Shanghai today. “We have very defined assets and capital that we want to put at work in the investment bank, and the business model works. Therefore, there is no necessity for us to make changes.”
Ermotti disputed a report by Mediobanca SpA analysts last week that Zurich-based UBS may dispose of the investment-banking business as higher capital requirements from regulators thwart efforts to boost returns. Ermotti is reorganizing the bank to cut 10,000 jobs and exit most debt-trading businesses while concentrating on money management to boost profitability.
The lender’s plan to increase its return on equity to 15 percent will be delayed by at least a year from an earlier target of 2015 after the Swiss regulator asked it to hold more capital for litigation risks, UBS said in October. Days later, Swiss Finance Minister Eveline Widmer-Schlumpf said leverage ratios are too low and banks may have to consider whether to keep securities businesses.
“The businesses that may be affected the most by a higher leverage ratio is our mortgage portfolio, is our corporate loan portfolio in Switzerland,” Ermotti said today. “To imply necessarily that a higher leverage ratio means that the investment bank is the one most affected is too much of a simple conclusion.”
Ermotti also said the debate over bank debt is shifting toward a stable, rather than higher leverage ratio.
The Basel Committee on Banking Supervision, which sets global standards, decided yesterday to dilute a planned debt limit for banks amid warnings that the measure would penalize low-risk financial activities and curtail lending. Changes to the leverage rule give lenders more scope to use an accounting practice known as netting to calculate the ratio, and ease proposals on how lenders determine the size of their off-balance sheet activities.
UBS rose as much as 3.2 percent in Zurich trading, and was 2.8 percent higher at 18.70 francs at 10:30 a.m. Swiss time. That outpaced the 1.4 percent increase in the 44-company Bloomberg Europe Banks and Financial Services Index.
“While this project may not be at the very front of his agenda, certainly, the concept of the spinoff will be something that will remain a strategic option for the bank,” Christopher Wheeler, one of the Mediobanca analysts who wrote the report, said by phone.
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 could offer shareholders a 14 percent upside, Wheeler wrote to clients on Jan. 9.
“Investment banking is very strategic for us,” Ermotti said. “We have been making a lot of changes to our strategy. The strategy is working, and is one that is focused on supporting our clients in wealth management, corporate and institutionals.”
UBS will boost its common equity ratio to 13 percent by the end of this year, Ermotti said, reiterating an earlier target. The bank has pledged to start paying out more than 50 percent of profit as dividends after it reaches the goal.
After posting losses in 2012, UBS reported a profit for three consecutive quarters. The bank said in October that third-quarter net income was 577 million Swiss francs ($638 million), more than the average analyst estimate in a Bloomberg survey. UBS will post full-year profit of 2.78 billion francs, compared with a 2.51 billion-franc loss in 2012, the estimates show.
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 at the time.
“Ermotti has done a great job in resuscitating the investment bank, and in many ways that’s why we think a spinoff is possible,” Wheeler said. “The debate around this matter will not go away.”
— With assistance by Jun Luo, and Cathy Chan