A UBS move to restructure its investment bank by concentrating on its traditional strengths and by exiting business lines that have been rendered uneconomical by changes in regulation and market developments, will be observed carefully by its peers and may push others to follow suit.
"The strong progress we have made over the last 12 months allows us to begin implementing this next phase of our strategy," said Group CEO Sergio P. Ermotti (pictured). "We are ahead of schedule in our plans to build additional capital strength and reduce both costs and risk-weighted assets."
In a statement today, UBS said its investment bank will focus on its traditional strengths including advisory, research, equities, FX and precious metals; and will continue to serve its corporate, sovereign, institutional and financial sponsor clients.
Despite remaining a partner to all of UBS's business divisions including wealth management - which is one of the divisions marketing structured products - the investment bank will reduce its fixed income capabilities and exit balance sheet and capital-intensive businesses.
From a structured products manufacturing perspective, 37% of the bank's manufacturing business was in the interest rates asset class, according to data from a recent SRP survey. The Swiss bank was the joint leader with Barclays for manufacturing market share in Europe for this asset class, at 13%.
A market source told SRP that this will produce quite a gap in the manufacturing arena "if they aren't doing the hedge anymore."
UBS said that the investment bank will consist of two core client segments including a corporate client solutions (CCS) unit, which includes all advisory and solutions businesses plus execution that involves corporate, financial institutions and sponsor clients. The unit, which will continue to provide advice and delivery of bespoke solutions including structured products, is expected to generate around one third of the investment bank's revenues and use around 15% of its Basel III risk-weighted assets (RWAs).
The second unit, investor client solutions (ICS) will include execution, distribution and trading for institutional investors, and will also provide support to UBS's wealth management businesses. ICS will comprise UBS's equities businesses which includes the bank's equity derivatives division, FX and precious metals. In the flow rates and credit divisions, UBS will maintain risk facilitation capabilities in line with its debt capital market and wealth management franchises.
ICS is expected to generate two thirds of the investment bank's revenues and use around 85% of its Basel III RWAs. UBS Investment Bank is the first capital-light Basel III-compliant bank and UBS expects that it will deliver returns well in excess of its cost of capital.
The lines of business to be exited will include many that do not meet their cost of capital sustainably, or are in areas with high operational complexity or long tail risks likely to weigh on future returns.
Exited businesses and positions will be transferred to the corporate centre from the first quarter of 2013, with co-chief executive officer of UBS Investment Bank, Carsten Kengeter, managing the exited businesses and positions to optimise risk and returns over time.
A spokesperson at UBS declined to comment on the impact of the restructuring in its structured products and equity derivatives (EQD) divisions, but said that the bank's equities business (which includes EQD) performed well with derivatives improving on gains from tightened funding spreads in Q3; weaker revenues in Europe, the Middle East and Africa, the Asia-Pacific regions and the Americas holding up in challenging markets; and changes in its own credit methodology and corrections related to prior periods.