UBS: Preparing to Dump Its Investment Bank?

The market had been expecting the worst from the first-half results of Swiss financial giant UBS (UBS), the European bank most affected by the U.S. subprime crisis. Yet, when the figures were announced on Aug. 12, UBS Chief Executive Marcel Rohner and the rest of the board had a few tricks up their sleeves to help offset one of the worst 12 months in the bank's history.

That's not to say the results weren't bad. The bank posted a second-quarter net loss of $329 million, compared with $5.1 billion in net profit over the same period last year. UBS also took a further $5.1 billion in writedowns, bringing total debt provisions related to the credit crisis to a staggering $43 billion.

More worrying for UBS, which runs the world's largest wealth management business, rich clients withdrew $40.3 billion from the bank's coffers in the second quarter. That compares with $31 billion in net deposits during the same period in 2007, raising fears that the bank's exposure to bad credit is having an effect on the reputation of UBS as a wealth manager.

Tripartite Structure

So what did Rohner and his colleagues unveil to combat the weak first-half numbers—as well as to offset fallout from accusations that the bank manipulated the U.S. auction-rate securities market (BusinessWeek, 7/30/08)? In a break from previous strategy, the bank's three divisions—private banking, investment banking, and asset management—will be reorganized into separate entities within the Swiss financial giant. Each will be given more autonomy over its operations, and incentives now will be linked more directly to each unit's performance. That's a change from before, when the high-flying wealth management division was dragged down by the underperforming investment banking unit.

"This shows that the universal banking model clearly hasn't worked for UBS," says Bob McDowall, European research director for financial-services consultancy Tower Group. Previously, UBS had interwoven its business units so that assets could be shared across departments. "The way it has [now] been set up is a halfway stage toward selling parts of the business."

Indeed, rumors have abounded that UBS would offload its investment banking division after the business was left holding toxic debt (BusinessWeek.com, 10/1/07) when the credit markets imploded last year. So far, the company's newly appointed chairman, Peter Kurer, has categorically denied attempts to spin off parts of the business. Yet when pushed by investors on Aug. 12, he said: "We haven't received any formal offers that come close to capturing shareholder value."

Playing Down Investment Banking

Despite the denials, analysts can't help but wonder what the impact will be when the bank's business divisions gain greater independence. According to research from Citigroup (C), UBS wealth and asset management operations will generate 62% of its 2009 revenues, vs. 38% from investment banking. In an Aug. 12 statement, UBS also said it would focus on wealth management as its main area for growth while reducing the size of its investment banking unit.

"The divisional separation is likely to fuel speculation [of an investment banking unit sale]," London-based stockbrokers Keefe, Bruyette, & Woods (KBW) told clients in a research note. The analysts added that any sale would be impossible before the division gained full independence by the end of 2009.

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