The record $1.5 billion fine paid by UBS over Libor manipulation and other regulatory breaches was yet another public relations disaster for Switzerland’s biggest bank. But for Sergio Ermotti, chief executive, it marked a leap forward in his attempt to clean up the lender’s many legacy issues.
The hefty fine ended a year in which the Swiss bank has seen one of its former traders go to jail, paid a penalty for the largest trading loss in British history and experienced a SFr349 million ($382 million) loss on the botched Facebook initial public offering. Together with the Libor issue, it all added impetus to a decision by UBS to drop its longstanding ambition to become a global full-service investment banking powerhouse.
However, the shrinking of the investment bank by winding down most of its fixed income business might continue to cause management headaches for several more years.
So far, the strategy to cut the investment bank in half by at least partially exiting areas such as bond, structured products and sovereign debt trading has sent the bank’s share price about a fifth higher since late October.
Ermotti hopes the move will turn the investment bank into a nimble and less risky unit that can achieve a pre-tax return on equity of more than 15 per cent.
However, investors and rival bankers are starting to assess the costs and risks of winding down a SFr560 billion balance sheet filled with derivatives, securities and other trading assets. And some are quite sceptical.
“Decommissioning an investment bank is like decommissioning Chernobyl,” the head of a rival investment bank says.
One analyst recently likened the move to Napoleon’s retreat from Moscow, saying this was certainly a good idea but “one still did not want to be part of his Grand army at the time” when only 5 per cent of the force made it home.
At UBS, the portfolio has been built up since 2010, long after the crisis started, and has been filled with healthy, not “toxic” assets. More than half of the portfolio is made up of derivative assets and it has no significant market risk as positions are fully hedged and the contracts mostly do not conform to incoming tougher capital rules, called Basel III.
That will spawn the interest of investors that do not have to adhere to those rules: hedge funds, asset managers and emerging market banks on the hunt for a bargain. They might be disappointed, however. “We will exit these businesses over an extended period of time to minimise [the] impact on results,” UBS said in a recent investor presentation.
Richard Barnes, analyst at Standard & Poor’s, says UBS does not need to dispose of the assets at fire sale prices: “The big question is: are the market conditions supportive enough to allow them to do this in the timeframe they are planning? But their regulatory capital position means they are not forced sellers so they can take their time if necessary.”