Another Investment Bank Chops and Changes

For the past five years, UBS (NYSE: UBS  ) has been trying hard to become one of the world's top investment banks. But the situation in Europe hasn't been kind to the Swiss bank. First, it had to be bailed out during the subprime lending crisis, and now, and now the sovereign-debt crisis is making matters worse. Now UBS is planning to chop down its investment-banking operations.

Investment banks' misery quantified
The investment-banking space is currently characterized by very low activity, with Europe in the midst of crisis, and also by high operating costs resulting from new, stringent regulatory norms. With Greece likely to default and credit markets uncertain across the rest of the eurozone, the near future looks scary. In a recent survey covering 14 investment banks, revenues for the three quarters of the year were down a hard 11.1% in dollar terms.

Of the banks surveyed, five have posted a more than 50% decline in pre-tax profit. These include top names such as Goldman Sachs (NYSE: GS  ) , Morgan Stanley's (NYSE: MS  ) investment securities branch, and Credit Suisse's (NYSE: CS  ) investment bank. UBS itself has posted a $1.2 billion loss. This climate provides the perfect backdrop for a serious change.

Change of guard, change of plans
First, the good news: For the first time in years, UBS has announced plans to pay a dividend of 0.10 Swiss francs ($0.109). The bank is planning to dispose of nearly half of its investment-banking business in the next five years.

Now the bad news: UBS looks to lay off nearly 2,000 workers from its investment-banking division. That's almost 11% of its total taskforce. In the next two years, nearly 1,500 will be given the axe, with 500 expected to be chopped off by 2016. By 2016, UBS expects to cut down its risk-weighted assets from $327 billion to $158 billion.

Though UBS expects to lose roughly $500 million in revenues by cutting down these operations, on the brighter side, it expects to boost its return on equity to between 12% and 17%, up from its lowly 3.5%. The bank now plans to shift its focus totally to its private banking operations and squeeze out as much as it can from its high-end customers by selling them more chic investment products.

The Swiss bank is in the midst of significant changes, following quite a tumultuous time that saw former CEO Oswald J. Grubel resign in the midst of a trading scandal. To follow new CEO Sergio P. Ermotti's shakeup at UBS, add the stock to My Watchlist.

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 26, 2011, at 4:00 PM, itmisc2006 wrote:

    Smart move. This will prevent the company from collapsing during bad economic in Europe and around the world.

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