UBS’s slimming strategy deserves two cheers

November 17, 2011

By Margaret Doyle and Antony Currie
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Give UBS two hearty cheers for its decision to slim down to a more suitable fighting weight. New Chief Executive Sergio Ermotti told shareholders on Thursday that the Swiss lender is to almost halve risk-weighted assets at the investment bank to 150 billion Swiss francs. Moreover, he is putting UBS’s private and Swiss banking operations front and centre. That’ll please regulators and investors alike.

But investors should hold off on the third cheer for now. Granted, the plans Ermotti and investment bank boss Carsten Kengeter have put together look sensible enough. They’re shutting several businesses that consume too much capital without providing commensurate returns, such as prop trading, non-mortgage securitisation and complex structured products. Others, like U.S. credit trading and synthetic equities, will be scaled back.

That shows a healthy dose of self-awareness: not only of the limitations of both capital constraints and its own penetration in certain businesses, but also of where an investment bank tethered to one of the premier global private banking franchises should draw the line.

On top of that, UBS is also trimming its return-on-equity ambitions for 2013 to between 12 percent and 17 percent – previously executives were aiming for 15 percent to 20 percent. The new target looks far more realistic. And the return of a dividend, however token, is welcome from a bank that already looks well capitalised with good liquidity.

But some of this looked overdue even before the painful $2 billion rogue trading loss in the summer. Several rivals have already slashed earnings targets. Some 45 percent of the balance-sheet trimming stems from offloading unwanted legacy assets. And this is not the first time UBS has insisted it’s embracing a client-centric strategy.

What’s more, shrinking ambitions while trying to maintain already dented staff morale is no easy task. UBS still needs to rebuild confidence in its compliance and risk-management practices in the wake of the rogue trading scandal. And executives must demonstrate they can stick to their knitting – though having legacy assets managed at group level should reassure investors that the investment bank won’t quietly plough the proceeds back into other ventures.

Ermotti and Kengeter are making the right moves so far. But the onus is on them to keep up the momentum.

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