After $43 billion in write-downs, UBS to split main businesses

Julia Werdigier
New York Times

Trying to salvage its reputation, the Swiss banking giant UBS announced changes on Tuesday that would separate its struggling investment banking business from its lucrative wealth management operation.

The banks’ three main units are wealth management, a prized division that focuses on banking for private clients; asset management; and the investment bank, where the brunt of the recent losses at the bank have occurred.

Separating the three would give each greater autonomy and “maximum strategic flexibility,” UBS said. Some shareholders said the split was intended to facilitate a sale, but the bank’s chairman, Peter Kurer, said the businesses were not for sale.

The bank, based in Zurich, has come under increasing pressure to make changes, having written down about $43 billion since the mortgage crisis started last summer, making it the European bank hardest hit by the market turmoil. By contrast, Citigroup, based in New York, has more than $56 billion in credit losses and write-downs in the last four quarters, while Merrill Lynch, also in New York, has marked down more than $45 billion.

UBS on Tuesday reported an additional $5 billion in write-downs on subprime assets and a fourth consecutive quarterly loss.

The losses have taken a heavy toll at UBS, known for its conservative investment strategy.

Seeking bigger returns and to compete with larger rivals, UBS heavily invested in the market for subprime mortgage securities.

Now, Marcel Rohner, who took over as chief executive last year, is reducing risk and cutting 5,500 jobs, almost half of that in the investment banking business. Some investors would like UBS to sell Paine Webber, the American brokerage house that it acquired in 2000.

The losses at UBS have already led to the departure of a chief executive, a chairman and other senior managers and led it to seek emergency investments from Singapore and Middle East funds. Since then, UBS has had to buy back nearly $20 billion in auction-rate securities as part of a settlement with the Securities and Exchange Commission and remains part of an investigation by state and federal regulators into whether it helped American customers evade taxes.

The management of UBS has pledged to revive confidence among its customers and shareholders, who saw the investment banking losses harm the reputation of UBS as a wealth manager. Investors also criticized how the wealth management business subsidized the investment banking unit with relatively inexpensive capital. Some shareholders welcomed the changes but said much more needed to be done, especially in the wealth management division. “The split will increase visibility and accountability, which is a good thing in a market like this, but it may be more important to stabilize outflows at the wealth management business and to hire private bankers,” said Adrian Darley, a fund manager at Resolution Asset Management in London.

UBS, the world’s biggest wealth manager, said clients withdrew a net 17.3 billion Swiss francs ($15.9 billion) from its two wealth management businesses in the second quarter, which was more than analysts had estimated. The biggest withdrawals happened in April, Mr. Rohner, the UBS chief, said, adding that he expected the worst to be over. The wealth management unit contributes more than 70 percent to group revenue.

Shares of UBS initially rose 3.8 percent on Tuesday in Zurich as some investors interpreted the announcement of the revamping as a sign that UBS was addressing its problems as write-downs in the second quarter met analysts’ expectations. But at the end of the trading day, UBS was down 2.4 percent in Zurich, bringing its decline for the year to 51.5 percent; shares fell 6.4 percent in New York on Tuesday.

Splitting the three divisions will make it easier to hold managers and staff directly accountable and “make UBS more effective and agile,” the bank said. The split, which is to be completed by the end of 2009, is the result of a review that revealed weaknesses with the integrated business model and “unnecessary layers of complexity,” Mr. Kurer said.

Still, he acknowledged that the changes were no miracle cure and that the bank would need to do more. “We’re by no means at the end of the road of a recovery,” he told analysts during a conference call. “There will be and must be more measures.”

Florian Esterer, a fund manager at Swisscanto Asset Management, said the plan to separate the businesses did not make up for a lack of an overall strategy. “It’s reacting to market pressures,” Mr. Esterer said. “I’m still missing a clear vision as to what they really want to do with the business.”

As part of the changes, UBS named John Cryan as chief financial officer, succeeding Marco Suter. Mr. Cryan was head of the financial institutions group at the investment banking unit. The bank also hired Markus U. Diethelm, the chief legal officer of Swiss Re, as general counsel and nominated four members to the board, including William G. Parrett, a former chief executive of Deloitte Touche Tohmatsu.

UBS also reported on Tuesday that it had a net loss of 358 million Swiss francs ($3.3 million) in the second quarter compared with a profit of 5.55 billion francs ($5 billion) a year earlier. The loss was eased by a tax credit of 3.8 billion francs ($3.5 billion).

The investment bank had a loss of 5.23 billion francs ($4.85 billion) after about $5.1 billion in write-downs and UBS said it would continue to reduce staff, costs and risky assets.

UBS posted revenue of 4 billion francs ($3.69 billion) in the period, down from the 16 billion francs ($14.8 billion) it reported in the second quarter of 2007.

It gave a bleak outlook for the second half of the year, saying it did not expect “any improvement in current adverse economic and financial market trends.”

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