UBS: Ossie Gruebel has spent the summer holiday sharpening his axe. Having committed to making up to 2 billion Swiss francs ($2.5 billion) of cuts by the end of 2013, UBS chief executive has now revealed what it all means for bankers trembling on the block before him. Some 3,500 face the chop, almost half of whom work for the Swiss bank’s struggling investment banking unit.
This is about more than just shrinking with the industry. Investment banking briefly enjoyed a false bubble in the aftermath of the crisis of 2008, particularly in fixed income, currencies and commodities (FICC) trading, as reduced competition meant those left standing could fill their boots. But, weaker markets in 2010 have continued this year. Clients are being more cautious.
The lack of a resolution to the euro zone crisis will only exacerbate the trend. Worse, costly regulation is starting to bite. The first-half results were a stark illustration of the problem. Just about everyone did badly. But, while some lenders like Barclays got away with a 22 per cent revenue decline in FICC between the first and second quarters of the year, UBS’s revenue fell 36 per cent. Costs in UBS’s investment bank soared to 86 per cent of the income. In response, Gruebel scrapped his 15 billion Swiss francs pre-tax profit goal for 2014. With revenues in dollars and costs in an increasingly strong Swiss franc, UBS has one hand tied behind its back. But, the firm also starts off with a sub-scale position in FICC, and its real competitive advantage lies in wealth management for high-end clients.
The question remains how big UBS should be in investment banking. The headcount reduction detailed on August 23 more than reverses net hiring in the investment bank in the year to the end of June. The investment bank is also taking almost double its pro-rata share of the overall cuts. UBS continues to insist it will be an integrated bank, and its private banking clients will need some sort of investment banking facilities. An Investor Day in November should give a better idea of what intregated really means for UBS. But, on the latest evidence, it doesn’t preclude a much smaller role for investment banking.
