Tough Chores Await the New UBS Chief

The plan: Shrink investment banking and boost wealth management

Sergio P. Ermotti, the new interim chief executive officer of UBS, faces “difficult times,” in the words of Chairman Kaspar Villiger, who announced his appointment. Some analysts take a starker view of Switzerland’s largest lender. “This is a bank now in disarray,” says Chris Wheeler, an analyst at Mediobanca Securities in London. “They’ve let the CEO walk away. They’ve left themselves in a vacuum.”

Ermotti, 51, was named to the job on Sept. 24 and is a candidate to win the post permanently. He replaced Oswald Grübel, who resigned after UBS announced it had suffered a $2.3 billion loss from “unauthorized trading.” Kweku Adoboli, 31, the UBS trader charged with the fraud and false accounting that may have resulted in the loss, remains in custody and has yet to enter a plea. UBS had hired Grübel, 67, out of retirement in February 2009 to stabilize the lender after the bank’s bets on U.S. mortgage-backed securities backfired. In 2008 the bank posted the biggest loss in Swiss corporate history and took a capital injection of 6 billion Swiss francs ($6.7 billion) from the government.

The new chief—who joined UBS in April as head of Europe, Africa, and the Middle East—must grapple with several pressing issues, analysts say. Along with rebuilding investor confidence shaken by the failure of the bank’s risk controls, he needs to carry out a plan to shrink the investment bank to conserve capital while bolstering wealth management operations, which generate about 41 percent of UBS revenue.

An Oxford-educated Swiss national, Ermotti was at Merrill Lynch for 18 years before joining UniCredit, Italy’s biggest bank, as investment banking chief in 2005. He expanded the business in an effort to compete with the world’s top securities firms. By the first quarter of 2007 the merger business was booming, and Ermotti was named deputy CEO in July 2007. In the wake of the collapse of the subprime market and the credit crunch, he had to retrench. He declined to comment for this story.

This isn’t the first time UBS has shifted strategy at the investment banking unit, which trades securities and commodities for clients and its own accounts, advises on mergers, and helps companies raise money through stock and bond offerings. Grübel began his tenure by cutting jobs and curbing risk-taking, missing the 2009 boom in fixed-income trading that allowed competitors such as Goldman Sachs and JPMorgan Chase to profit.

In November 2009, as the bank neared the end of its third straight year of losses, he said he wanted UBS to reach 15 billion francs in pretax profit by 2014. He added staff at the investment bank and put more of UBS’s money on the line. Value at risk, a measure of how much UBS could lose in securities markets on a single day, rose to 75 million francs in the second quarter of this year, from 48 million francs the year before. UBS continued to trail competitors, and pretax profit at the investment bank slumped to 376 million francs in the second quarter of this year from 1.31 billion francs in the previous year. “They have to accept the reality that the business model is gone,” says Enrico Racioppi, an analyst at Hammer Partners in Lugano, Switzerland.

While shrinking the investment bank, Ermotti will have to be careful not to undermine the wealth management business, which oversees 1.4 trillion francs for affluent individuals. Clients withdrew 198.7 billion francs from the wealth business in the 27 months through June 2010. The bank has been attracting new money since then. Some of that growth has come from Asia, where last year there were more millionaires than in Europe for the first time, according to a survey by Capgemini and Bank of America. “It’s very important that we have the investment banking platform to support our clients,” says Allen Lo, the bank’s head of wealth management in Hong Kong. “Asia Pacific offers enormous long-term growth opportunities.” Peter Hahn, a professor of finance at London’s Cass Business School agrees: “For UBS, the future has to lie in Asia, related to entrepreneurs and their wealth.”


    The bottom line: Ermotti has to steer UBS away from investment banking while bolstering wealth management, which oversees 1.4 trillion Swiss francs.

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