As top members of staff quit UBS, will its plan to split into divisions be enough to save it, asks Rosemary Gallagher
Private banks, such as UBS, struggle to attract and retain good advisers, as they focus on new money all the time
IT'S unlikely that serial entrepreneurs Chris Gorman and Sir Tom Hunter will be extending their sympathies to stricken investment
bank UBS, given their high-profile legal spat in 2005. Last Tuesday, the Swiss bank reported a net loss of $329m for the second quarter of the year. To date it has been forced to write down $42bn, making it the biggest European casualty of the credit crunch, and there are fears that more bad news is on the cards.
But Gorman and Hunter could be forgiven for not feeling much pain over UBS. Jon Wood - a former star trader at the firm - was one of the key investors in their Gadget Shop operation, which ran into difficulties and subsequently collapsed. Wood took the pair to court in November 2005 over a dispute involving greeting card chain Birthdays.
Wood, and the entrepreneur Peter Wilkinson, accused Hunter and Gorman of cutting them out of a deal to buy Birthdays. The pair embarked on a well-publicised GBP 100m lawsuit against Hunter and Gorman, accusing them of "stealing" the card shop.
Although the Scotland-based duo came out on top, with the judge in the case describing Wood as "evasive" and a "very hard and calculating man", their reputations had been dragged through the mud. The courtroom spectacle included accusations of heavy boozing, tabletop dancing in Mediterranean resorts and grown men crying in board meetings.
Although Wood has moved on to a new venture, running the SRM Global hedge fund, Hunter and Gorman would have to be very forgiving to not harbour feelings of bitterness towards UBS. Hunter subsequently dumped UBS for all his banking deals.
As well as the bank proving to be one of the biggest losers in the current credit market turmoil, it is now in the embarrassing situation of not having any analysts to cover the insurance sector.
Last week it was forced to issue a note stating that "following a reallocation of resources… we are ceasing coverage of Aviva, Friends Provident, Legal & General, Prudential, St James's Place and Standard Life, effective immediately."
The announcement followed the departure of well-respected insurance analyst Roger Hill, who decided to take early retirement from the firm after 20 years' service. UBS claims it has several candidates lined up to cover the life insurance sector, but in the meantime it will have to live with the gap.
UBS's clients are sticking by it for the time being. Standard Life said it is not an issue that the firm is without an insurance analyst and it has no plans to ditch it as house broker. But commentators say the vacuum at such a turbulent time will damage its reputation.
And insurance is not the only sector in which UBS has gaps to fill – it is also without analysts to cover real estate and European food retailers. An industry source said too many "cessations of coverage" will damage its standing as a provider of quality research.
The absence of analysts adds to the woes of UBS, which on Tuesday declared another £2.7bn writedown on credit positions in the second quarter of the year. The problems faced by the world's largest bank to the rich largely stem from credit issues in the United States, but commentators say its private banking strategy is also to blame.
Ken Taylor, director of Mackenzie Taylor Wealth Management, said: "Private banks, such as UBS, struggle to attract and retain good advisers, as they focus on new money all the time. There is little commitment to ongoing service or regular reviews. UBS is a massive organisation and it will survive, but it does not really deserve to exist in the mass affluent market."
Also last week, UBS agreed to buy back almost $19bn of bonds after an investigation by US authorities over allegations it had steered clients towards auction-rate securities – debt which became impossible to sell after the market froze. This will cost it $900m.
On top of that, it suffered massive net outflows in the second quarter on the back of damaged client confidence. The core wealth management business saw net outflows of £8.45bn. Separately, £978.3m was moved out of business banking in Switzerland, while global asset management reported a net reduction of £11.9bn.
While it is still a massive employer with about 6,500 staff in the City of London, it conceded it has been forced to make job cuts. In total, 2,387 jobs were axed around the world in the second quarter. For those who survived, a new bonus structure is to be introduced to "balance risk and reward" and the risky trading positions that have led to the writedowns of more than $40bn will be scaled back. In a bid to dig itself out of its financial hole and appease shareholders and clients, UBS announced on Tuesday that the organisation will be split into three autonomous divisions: investment banking, private banking and asset management.
Peter Kurer, UBS's chairman, said the decision to give greater autonomy to its divisions, which should be implemented by the end of 2009, would allow each greater flexibility. "This will allow us to capture shareholder value in the appropriate way at the appropriate time," he said.
It also named high-flying City banker John Cryan as its new chief financial officer. He replaces Marco Suter, an ally of former chairman Marcel Ospel, who was toppled in the crisis. The rejig comes following pressure from shareholders, including Luqman Arnold, who was chief executive of UBS briefly before being ousted in 2001. Arnold has a 2.8% stake in UBS through his private equity vehicle Olivant.
Olivant welcomed the new direction, saying: "The separation of the divisions provides a basis for exercising strategic options." However, analysts said the move gave little immediate impetus for shareholders to rethink the value of UBS's wealth management division, which has been tainted by its association with UBS's investment bank. A more drastic option would be to sell off part of the business.
Kian Abouhossein, an analyst with JP Morgan, said: "We believe UBS investment bank will be not fully owned and even potentially disposed of by UBS over the next two years."
But Kurer has played down the chances of a potential 'fire sale', although he has not ruled it out completely. "For the time being, there are no plans to divest," he said.
Barclays has been touted as a possible bidder for the investment bank, but analysts say it may be put off by its exposure to the US subprime market.
UBS will be hoping that Cryan will be able to get the business back on track if a sale is to be avoided. He is currently head of UBS's financial institutions business in London. The 48-year-old Brit is among an elite of bankers whose client list spans big names in the UK and the US. He was one of ABN Amro's chief strategists in the auction of its business last year. His appointment is seen as a further sign that the bank is planning to do lots of deals. And if UBS is split up, his experience should prove valuable.
In the short term, UBS has admitted its prospects are not looking bright. It painted a grim outlook for the rest of this year, saying it expected no improvement in the "adverse economic and financial market trends" that had affected the second quarter.
