UBS Faces Investor Pressure to Hive Off Investment Bank
UBS AG (UBSN) Chief Executive Officer Sergio Ermotti said his overhaul of Switzerland’s biggest lender is paying off as investor Knight Vinke Asset Management LLC called for a spinoff of the investment bank.
Ownership of investment bank, which “nearly destroyed UBS” during the financial crisis could be transferred to its employees and managers, New York-based Knight Vinke said in an open letter to shareholders before UBS’s annual general meeting today. The firm said it owns almost one percent of UBS shares.
Ermotti announced plans last year to eliminate 10,000 jobs and exit most debt-trading businesses to concentrate on money management and boost profitability. UBS this week posted first-quarter earnings that exceeded analysts’ estimates on higher revenue at the investment bank and in wealth management.
Those results are “clear proof” the strategy “is working,” Ermotti, 52, told investors at the meeting in Zurich.
The investment bank posted a 92 percent gain in first-quarter pretax profit to 977 million francs ($1.1 billion), UBS said on April 30. That was more than triple the average analysts’ estimate of 321 million francs. The unit had a pretax return on equity of 49.5 percent for the quarter, increasing from 17 percent a year earlier and exceeding a goal for the year as a whole of more than 15 percent.
“We question the merits of keeping the investment bank under the same roof as the wealth management and Swiss banking businesses,” Knight Vinke said. “The investment bank has delivered a good set of results for the first quarter of 2013 but nearly destroyed UBS in 2007-09. Investment banking is a very risky business and these risks pose a serious threat to UBS’s wealth management and Swiss banking franchise.”
Losses during the subprime crisis forced UBS to seek a government bailout in 2008 to help it spin off toxic assets. In 2011, a $2.3 billion loss from unauthorized trading led to the exit of former CEO Oswald Gruebel.
Ermotti said that while 2012 results may not reflect all the progress the bank has made, “our share price paints a clear picture of everything we have achieved on an operational and strategic level.”
UBS fell 0.2 percent to 16.57 Swiss francs at 3:56 p.m. in Zurich. The shares have risen about 46 percent over the past year, bringing gains in 2013 to about 16 percent. Zurich-based Credit Suisse Group AG has increased 21 percent this year.
Knight Vinke, led by founder Eric Knight, targets large, publicly traded companies and seeks to recruit other institutional investors to press the companies’ management to change course. In 2007, the firm said that HSBC Holdings Plc (HSBA), Europe’s largest bank, misled investors about a new share plan payable in 2008 to reward management. It’s in dialog with Italian energy producer Eni SpA (ENI) about group structure, according to its website.
No Knight Vinke representative spoke publicly at today’s meeting and the proposal to split off the investment bank wasn’t discussed.
“The firm is on track and comfortable with its new strategy,” UBS said in an e-mailed statement after the meeting. “The results of the first quarter confirm that the company made significant progress and is reaping the benefits from its focus on wealth management and the Swiss bank supported by focused and de-risked investment banking activities and asset management.”
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