UBS Seen Proceeding With Care To Revamp Private Bank
UBS AG faces a difficult balancing act as it looks to slash costs after a disastrous year: scaling back enough to cut losses at its investment bank, while avoiding too much pruning that could cause turmoil at its money-making private bank.
Analysts and investors are largely in agreement with UBS' plans to cut 5,500 jobs out of 83,560 by mid-2009, but many express concern over the disruption the restructuring may cause to private clients accustomed to white-glove service.
"Cutting costs without at the same time damaging the long-term revenue-generating ability is a difficult exercise," S&P equity research analyst Derek Chambers said of the private bank. S&P rates UBS at hold with a CHF35 target.
UBS plans to make dramatic cuts to its investment bank after more than $37 billion in write-downs for toxic mortgage securities. However, its private bank will also be trimmed, though UBS is pledging to keep adding client advisors, as opposed to cutting them.
UBS is likely to chop staff who don't deal directly with clients to cut costs - and hope that clients don't notice any change in service.
"If you have a lot of money being handled, you will want to be sure that all the processing goes right, the statements are issued correctly and your money is looked after correctly - all things that require back-office people," Chambers said.
The faintest whiff of change at the private bank is likely to make clients nervous and cause more withdrawals, something UBS is taking steps to avoid. Last week, the bank sent 2.5 million letters to clients in an effort to stop outflows in Switzerland seen in the first quarter. UBS declined to disclose the amount of outflows in Switzerland, but analysts gauge them to be dramatic, going by the paltry showing in the bank's overall fresh funds.
Any additional turmoil for the private bank likely means stronger demands from activist shareholder Olivant Advisers Ltd., which has been urging UBS to consider disposals or even a split-up to protect the private bank, a lucrative, low-risk driver of profits.
A spokesman for Olivant, which made its demands public before UBS disclosed the job cuts and restructuring, declined to comment on the investment firm's next move.
UBS shares have slumped nearly 35% so far this year, partly over concern that subprime losses will hit the private bank. The stock has underperformed the Dow Jones Stoxx bank index, which has shed 12% in the same period.
While most analysts agree that some cuts are necessary at the private bank as UBS struggles to contain costs, some argue that the far more dramatic scaling back at UBS' investment bank doesn't go far enough. The private bank will continue to be haunted by reputation spill-over from the subprime losses for some time to come, said Peter Thorne, London-based analyst with independent brokerage Helvea.
"It is almost as if the bank were in a state of denial. There is plenty of ammunition here for Luqman Arnold's Olivant to go on the attack again," Thorne said. He rates UBS at accumulate with a CHF40 target.
Money-management for the wealthy is a far more stable business with little similarity to the hire-and-fire mentality prevalent at investment banks.
Investment banks make their money with activities such as issuing stocks and bonds, trading securities and advising on mergers and acquisitions, all of which have been hit dramatically by the credit crunch. Private banks make money through transaction and other fees - much of them automatically recurring - collected from wealthy clients. Private banks such as UBS traditionally cater to clients with at least $1 million in liquid assets.
UBS' investment bank, which posted 40% of the bank's profit before tax in 2006, has been rocked by the more than $37 billion in subprime write-downs in recent quarters, leading the overall bank to two consecutive quarterly losses.
UBS’ private bank traditionally contributes the bulk of profit - 55% in 2006 - but is expected to become an even more-dominant money maker as the investment bank scales back. Major job cuts in private banking are rare, and the recent economic boom fueling personal wealth has seen most banks add, not trim, staff.
An example of major disruption to a private bank was in 1998, after Union Bank of Switzerland and Swiss Bank Corp. merged to form UBS. The new bank cut jobs and lost considerable business from wealthy clients, who had accounts with both predecessor banks and didn't want to merge their assets.
"There was a period of turmoil from 1998 to 2000, when they were clearly losing business in trying to integrate," S&P equity research's Chambers said.
To be sure, analysts say UBS' private bank will ultimately weather the subprime storm, even if rivals are encroaching on the bank's market share amid the troubles.
"You tend to see private banks in general pretty resilient against these kind of shocks, and while first-quarter inflows have dropped to very low levels, we haven't seen outflows," Matthew Clark of Keefe, Bruyette & Woods said. He rates UBS at underperform with a CHF35 target.
- Katharina Bart, Dow Jones Newswires; +41 43 443 8043; katharina.bart@dowjones.com
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