UBS in ‘Disarray’ as Gruebel Quits, Ermotti Named Interim Chief Executive
Gruebel, the head of Switzerland’s largest bank since February 2009, was replaced on an interim basis by Sergio Ermotti, who joined less than six months ago as CEO for Europe, the Middle East and Africa, UBS said on Sept. 24. The resignation of Gruebel, 67, who restored the Zurich-based bank to profit after record losses, marks the third CEO departure since 2007.
“This is a bank now in disarray,” said Christopher Wheeler, an analyst at Mediobanca Securities SpA in London, which cut its rating on UBS to “underperform” today from “outperform.” “The board made a terrible blunder” by not persuading Gruebel to stay, he said.
Morale within the investment-banking division, already depressed following the trading scandal, dropped even further in the wake of Gruebel’s departure, according to an executive at the unit who requested anonymity because he wasn’t authorized to speak publicly.
As the fallout from the trading scandal widens, a senior executive at UBS speculated that Gruebel quit to prevent the greater disruption that might have resulted from the departure of investment-banking chief Carsten Kengeter, who’s in the midst of shrinking the division. Kengeter, 44, is viewed by some at UBS as a favorite of Chairman Kaspar Villiger. Villiger told reporters after Gruebel’s departure that Kengeter had done an “excellent job” in covering positions after the loss and that there was no doubt about his future. Another executive suggested Gruebel stepped down after a call to shake up the board was rejected.
UBS rose 5 percent to 10.63 francs in Zurich trading as Goldman Sachs Group Inc. analysts Jernej Omahen and Peter Skoog said the firm remains their top pick among European investment banks. Gruebel’s departure “adds weight” to UBS comments on accelerating the downsizing of its investment bank, they said in a note to clients today.
The shares are down 31 percent this year, compared with a 34 percent tumble in the Bloomberg Europe Banks and Financial Services Index, which tracks 46 companies.
Gruebel, in a memo to staff, said he was convinced a change of leadership at the top was in the best interests of UBS. He resigned as the board grappled with the aftermath of the trading loss in Singapore, where members and executives convened for a meeting scheduled to coincide with the bank’s sponsorship of the Singapore Formula One Grand Prix.
“That it was possible for one of our traders in London to inflict a multibillion loss on our bank through unauthorized trading shocked me,” said Gruebel, a former trader whose career in finance spanned half a century. The scandal dealt a “significant setback” to UBS’s efforts to rebuild trust, he said in the memo.
Gruebel, who joined UBS after about 37 years at rival Credit Suisse Group AG, is the only person to have served as CEO of both of the biggest Swiss banks. Brought out of retirement to rebuild UBS after record losses, he returned the bank to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank.
Two senior UBS executives speculated on whether other departures might follow, such as Kengeter, Maureen Miskovic, 54, who took over as chief risk officer in January, and Thomas Daula, the chief operating officer at the investment bank. Miskovic previously served as chief risk officer at State Street Corp. and held the same role at Lehman Brothers Holdings Inc. for six years until 2002.
Daula, hired in June 2008 to run risk management at the investment bank, had been chief risk officer at Morgan Stanley in 2007 when that bank wrote down $9.4 billion on wrong-way proprietary trading bets on mortgage-related securities. He became COO at UBS’s investment bank in January.
Gruebel and Kengeter, 44, tried for the last two years to rebuild UBS into a top-tier investment bank, hiring more than 1,700 people and bringing in new business heads to replace those that left or were fired. They also increased risk-taking. Market turmoil and rising capital requirements led them to begin reversing that strategy even before the trading loss. The retrenchment is likely to accelerate now.
“In the future, the investment bank will be less complex, carry less risk and use less capital to produce reliable returns and contribute more optimally to UBS’s overall objectives.” Villiger, 70, told reporters two days ago.
UBS will probably scale back credit businesses that haven’t been very profitable and that will be affected most by the higher capital requirements under Basel III, said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London who has a “hold” rating on UBS stock. The equities business, by contrast, “has a relatively high return so you’d expect them not to close that down,” Leech said.
UBS will announce further changes to the investment bank in a presentation to investors scheduled for Nov. 17, Ermotti said on a conference call with reporters two days ago.
“They’ve got to change the aspirations of the investment bank and they’ve got to shrink it,” said Peter Thorne, a London-based analyst at Helvea SA.
UBS said it may be unprofitable in the third quarter after the unauthorized trading. The loss, less than two months after Gruebel said the firm had “one of the best” risk-management units in the industry, raised questions about the bank’s controls.
It resulted from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, UBS said on Sept. 18. While the positions were taken within the “normal business flow of a large global equity trading house,” the size of the risk was hidden by phony trades, UBS said at the time.
Kweku Adoboli, 31, the UBS trader charged with fraud and false accounting that may have resulted in the loss, remained in custody after a hearing in London on Sept. 22. He has yet to enter a plea.
Gruebel’s decision to leave throws into relief the lack of a succession plan at UBS, analysts said. Villiger is scheduled to step down in 2013 and be replaced as chairman by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance Kengeter will ascend to the top job.
‘In a Vacuum’
Villiger, on the conference call with reporters on Sept. 24, said the board tried unsuccessfully to persuade Gruebel to remain until the annual shareholders meeting. He will be paid for a six-month notice period and have no further role at the bank. His sudden departure suggests a worrying level of disorder, especially as Chief Financial Officer Tom Naratil took up his post only three months ago, said Mediobanca’s Wheeler.
“They’ve left themselves in a vacuum,” Wheeler said. “It’s got a brand new CFO and now they’ve let the CEO walk away.”
Ermotti, a 51-year-old Swiss national who joined UBS in April after working at Merrill Lynch & Co. and UniCredit SpA (UCG), will be interim CEO while the board seeks a permanent successor to Gruebel, the bank said. In his 18 years at Merrill Lynch, Ermotti oversaw businesses including the global equities division before leaving in 2003 to join UniCredit, Italy’s biggest bank.
As UniCredit’s investment-banking chief, Ermotti also supervised global transaction and private banking. Ermotti had aimed to compete with the world’s top securities firms as mergers soared and business flourished before the subprime crisis spread and credit became scarce. He later scaled back the plan to focus on corporate and investment-banking business in UniCredit’s home markets.
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