UBS faces up to uncertain future

The shock resignation on September 24 of Oswald Grübel, UBS’s gruff chief executive, has intensified speculation about the future business model of one of the world’s biggest banks.

UBS’s strategy was already a live topic ahead of its keenly awaited investors’ day on November 17. Meeting in New York, top executives were expected to map out the future for the group, particularly in investment banking.

The event gained significance after UBS’s disappointing second quarter results in July, which showed the expensive and time consuming rebuilding of the investment bank after the credit crunch had fallen short of expectations. Simultaneously with its results announcement, the group in July announced 3,500 job cuts to save money, with the heaviest blow falling on investment banking.

That restructuring is now expected to be significantly more radical. UBS is being pressed by Switzerland’s regulators to scale back its investment bank and reduce risk – raising doubts about the future of the unit, even though bank officials argue they are committed to having a strong standalone securities operation.

Sergio Ermotti, appointed interim chief executive after Mr Grübel’s resignation, has supported investment banking as an integral part of UBS. Although only working for the group since last April, Mr Ermotti has fully backed the “one bank” strategy, combining private banking, investment banking and asset management, introduced by his predecessor.

As a former joint global head of equities at Merrill Lynch, Mr Ermotti is closely identified with the securities trading tradition that is central to UBS’s business model. Even in his last job as deputy head of Italy’s UniCredit, investment banking was his core responsibility.

Nevertheless, the cuts at UBS’s investment bank are now expected to go significantly deeper than was likely before the group’s $2.3bn (€1.7bn) loss in an alleged rogue trading scandal and Mr Grübel’s departure.

UBS is expected to focus on its global strengths in equities and on its reputation for corporate advisory work, but scale back further its presence in fixed income. And, more than ever, the group will emphasise the investment bank is at the service of the group’s powerhouse private banking operation.

But even such deep cuts will not go far enough for the group’s harshest critics. They argue UBS has learned nothing from the credit crunch, when its investment bank wrote off more than $50bn on toxic securities.

“The Swiss public and regulators have recognised reality. UBS has got to shake off completely its grandiose investment banking ambitions,” says Peter Thorne of Helvea, the Swiss brokerage.

Swiss politicians, especially on the left, argue only a closure or divestment of the investment bank will do. For them, only then can UBS, which required a state bail out during the crisis, look forward to an eventual renaissance as a giant pure play private bank, free of unnecessary risk and regular lurches into loss.