Even before UBS, the giant Swiss bank, lost $2.3 billion in a rogue trading scandal five weeks ago, it was determined to shrink its investment banking operation to placate regulators and to improve profitability.
To give the bankers a flavor of what to expect at a firm whose focus was increasingly shifting toward the more profitable and less risky business of wealth management, their boss, Carsten Kengeter, had arranged for a special guest speaker: Jürg Zeltner, UBS’s head of wealth management.
An enthusiastic Mr. Zeltner told the bankers that their division was still much needed even as it faced far-reaching cuts, according to a person who was present but declined to be named because the meeting was private. In fact, the key to improve UBS’s profitability and share price, the Swiss manager said, was to outsmart the competition by having investment bankers work closer with their colleagues in wealth management and share more clients.
The abrupt resignation of Oswald J. Grübel as chief executive last month over the trading loss left the new investment banking strategy mainly in the hands of Mr. Zeltner and Mr. Kengeter, the head of investment banking, who came from Goldman Sachs three years ago. UBS’s interim chief executive, Sergio P. Ermotti, came to UBS only in April and it was unclear whether his role would be made permanent.
“What they are trying to do has never been done before,” Christopher Wheeler, an analyst at Mediobanca, said. “They want to shrink the investment bank by choice, which means unwinding positions without loss and running down their books while keeping the morale among staff, and it’s unclear who’s running the shop.”
The sudden shift of UBS, long one of Europe’s major investment banks, is driven by a disappointing performance but also by demands from Swiss regulators and politicians to abandon riskier practices like proprietary trading and to buttress their operations with more capital.
Switzerland, which is not part of the European Union, already has stricter capital rules than the rest of the region, but European leaders are considering forcing banks to hold more reserves to cushion them in a crisis. UBS officials say they hope that their urgency to restructure could give it a head start against rivals like Deutsche Bank.
UBS is expected to reveal the investment banking plans to investors at the Waldorf-Astoria in New York on Nov. 17, but some analysts said the bank might present some details on Tuesday;, when it releases its third-quarter earnings figures.
The question is whether UBS can shrink the investment banking business enough to satisfy investors and Swiss regulators without disrupting its other operations, losing lucrative clients or costing too much. With a smaller investment bank, UBS expects earnings growth to come from attracting high-net-worth clients with services and products created by linking investment banking and wealth management closer together, especially in Asia. For example, UBS would help a family-owned business in Hong Kong sell shares on the stock market and then offer advice on how to manage the proceeds.
“The increasingly close relationship we enjoy with wealth management allows its clients to more actively benefit from the full capabilities the investment bank offers,” Mr. Kengeter said in an interview this month. “In today’s market and regulatory environment, that proposition has never been more compelling.”
Much is at stake for UBS, whose investors are slowly running out of patience after watching the bank stumble from one credibility crisis into another, forcing three chief executives out the door in five years.
UBS is not alone among banks seeking to scale back their investment banking business at a time of declining trading revenue and stricter capital requirements. Goldman Sachs and Bank of America are also cutting thousands of jobs. But unlike them, UBS missed out on a fixed-income trading boom in 2009 that generated big profits on Wall Street because it was still repairing its troubled credit operation.
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