UBS is the wrong target for an activist-led breakup. Knight Vinke has called on the Swiss bank to separate its risky investment banking business from the core wealth-management arm. The campaigning investment firm is right that no one would create a bank modeled on UBS as it is today. But it doesn’t automatically follow that a breakup is the best strategy.
This week’s results were the first set of full quarterly numbers since UBS set out plans to shrink and cut risk in its troubled investment bank back in October. The firm is performing well across the board, and has a peer-leading 10.1 percent core Tier 1 ratio. The shares trade at a premium to book value. Other bank-sector investments still languish at 0.6 times book value, and have less capital to absorb losses. Knight Vinke says, with justification, that the best time to review strategy is when things are going well. The last time a UBS breakup was debated in public was when former UBS employee Luqman Arnold called for one as the financial crisis was raging in 2008.
The argument for doing the splits is that it is the only sure way to protect wealth management from potential losses in the investment bank. The snag is that separation would remove the synergies between wealth management and investment banking - the first is a big customer of the second, for example. Above all, it would carry big one-off costs. As a standalone entity, the investment bank would almost certainly require an additional capital injection to be able to fund itself. It’s not clear where that capital would come from. Meanwhile, UBS is lumbered with 382 billion Swiss francs of non-core assets that look like a huge obstacle to corporate change.
The alternative is to continue with the current model and protect the wealth management franchise by stuffing UBS with more capital and cutting risk in the investment bank. That’s essentially the strategy that the chairman, Axel Webel, and the chief executive, Sergio Ermotti, have carved out. Their plan is to turn UBS’s investment bank into a super-boutique in the model of SG Warburg, focused on advisory and equities. Mr. Ermotti is undoing much of UBS’s disastrous dash to bulk up in fixed-income trading at the height of the credit boom.
But that doesn’t mean Knight Vinke is totally wrong. There are questions about UBS’s commitment to its new course and just how far it is willing to withdraw from risky trading activities. Mr. Ermotti should see Knight Vinke’s intervention as a warning - stick with the program and don’t stop cutting risk.
Dominic Elliott is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
