It’s not new that UBS’s investment banking business has been facing major headwinds.
UBS announced last month that it plans to lay off 3,500 of its workforce as part of cost-cutting efforts. Half of those job cuts were expected to come from the firm’s investment banking operations. So the ibank is already huffing wind with fewer employees and lower profits.
Last month a source told us “the investment bank is [email protected]#%!d.”
Now, the $2.3 billion loss at UBS believed to be caused by a lone rogue trader might prove to be the straw that breaks the camel’s back at the embattled Swiss firm’s investment bank unit.
Here are three reasons why we think UBS’s investment banking business could be doomed.
1. Lack of risk management: Perhaps the most obvious is the alleged rogue trade at UBS that revealed fundamental flaws in the bank’s risk management and use of internal controls. According to a report from the Wall Street Journal, UBS “said it put in place new risk-management practices, pulled back from proprietary trading and focused on a low-risk, client-driven model.” Also, during the second quarter earnings call, chief executive Oswald Gruebel said, “I’m pretty convinced that we have one of the best risk managements in the industry.” Clearly, that’s not the case. It’s almost unfathomable how no one, including top executives such as chief executive Gruebel and head of the investment bank Carsten Kengeter, realised there was exposure to a $2.3 billion loss. What’s even more alarming is the alleged rogue trader Kweku Adoboli had to confess to UBS in an email that he had accumulated the losses. So what this could ultimately mean is there will be backlash in the clients’ trust in the bank.
After 2008, any holes in risk management are a no-no. Making matters worse is that Gruebel insisted that their risk management operations were tight multiple times in the second quarter.
2. Regulatory pressure: According to Robert Peston at BBC, “the Swiss government is putting intense pressure on UBS to separate or close its investment banking operations.” In addition, U.S. regulators are reportedly now considering extending the proponents of the Volcker rule as part of the Dodd-Frank financial reform bill to apply to overseas firms that have operations in the U.S.
3. Lagging investment bank profitability: During the second quarter earnings call, chief executive Gruebel acknowledged many problems challenging the UBS investment bank; one of them being the decrease in trading volume that all firms will be dealing with for the foreseeable future. So far, the investment bank brought in an “unimpressive” $1.4 billion in 2011, Reuters’ Felix Salmon reported. Another blow to the investment bank’s profits is that the $2.3 billion trade loss “could lead UBS to report a loss for the third quarter of 2011,” the firm said in its media release. Shares of UBS have tumbled since the news of the rogue trade.
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