Investment Strategies
We Admire UBS's Boldness In Cutting Risk, Uncertainties Remain - Analysts

The recent move byUBS to sharply cut risks in its investment banking arm and focus more on wealth management drew praise from Mediobanca, but its analysts warned that carrying out the change will be a tough challenge.
Earlier this month, UBS said it will slash its risk-weighted assets in investment banking by around 50 per cent to SFr145 billion (around $158 billion) from a SFr300 billion level, in a move to cut risk and focus more on its wealth management operations. The firm suffered massive losses in the 2008 sub-prime mortgage sell-off and more recently reported a $2.3 billion loss caused by unauthorized trading.
Mediobanca has “modestly” cut its earnings per share forecasts for 2012 and 2013 on UBS, retaining its target price of SFr14 per share.
“UBS provided very little detail on the execution of its RWA [risk weighted asset] reduction plan. Given the substantial volume of RWA banks are seeking to shed and the limited number of buyers, the risks are substantial,” Mediobanca said in a note yesterday.
“UBS is breaking new ground in purposely shrinking its investment bank in such a meaningful way,” it continued, adding that the new senior staff, such as chief executive Sergio Ermotti, do not have wide experience in such a venture.
The investment banking cutbacks come at a time when large integrated groups, including those with investment banking operations, are examining their investment banking business models. New capital rules and tighter regulations are squeezing these businesses. Swiss banks, meanwhile, face pressure from developments such as a strong Swiss franc and foreign attacks on Swiss banking secrecy laws.
Mediobanca said that UBS may, if it manages to push changes through, become a “cash cow” by 2014, although other banks may also be in a similar position in that year.