Print this article

UBS Unlikely To Suffer Badly After Trading Loss - Industry

Tara Loader Wilkinson

21 September 2011

The last three years have not been kind to UBS. Lurching from one disaster to the next, Switzerland’s largest bank seems rarely out of the headlines. Unfortunately this is a trait incompatible with the discretion-loving ideology of Swiss private banking.

Last week’s rogue trading scandal cost UBS an eye-watering $2.3 billion (not to mention possible losses due to reputational damage), and has wiped 11 per cent off the bank’s share price. Top private bankers may trigger outflows by jumping ship if the loss eats into their bonus pool, say headhunters. Critics believe the saga could be the final straw for wealth management clients, who, spooked by the ostensible lack of risk controls, may exit in their droves.

“The apparent failure of the bank's control systems in this instance is a real worry to clients as such a failure could severely damage the stability of the bank.” said David Scott, a former UBS private banker and founder of boutique manager Vestra Wealth.

UBS is doing all in its power to stem departures. Chief executive Oswald Grübel wrote to private clients on Friday to reassure them that the loss racked up by 31-year old "Delta One" trader Kweku Adoboli, affected only the investment bank and not the bank’s wealth management division. “Your assets are safe with us,” he said. In the letter he asserted that UBS is “one of the world’s best capitalised banks.” Grübel is expected to send out a second supplication to clients this week.

But perhaps counter-intuitively, some believe Grübel has little to fear – at least in the wealth management quarters. The saga is unlikely to result in large numbers of UBS wealth management clients closing accounts, according to Sebastian Dovey, managing partner at Scorpio Partnership.

“UBS remains a resilient business. For the present, this appears to be an investment banking-related event. If there is a fundamental change in the business structure of UBS Group then possibly private clients will re-evaluate. But at this moment in time, it is most likely going to be isolated,” he said.  

There are three fundamental reasons why clients may stay.

Clients have high pain thresholds

Firstly, one could argue that UBS’ more skittish clients will already have left long ago. Some will have left when UBS had to bailed out by the Swiss government after sustaining heavy losses due to toxic sub-prime mortgages. Others went when it was fined $780 million by the US authorities to settle civil and criminal charges related to its alleged role in helping US citizens evade taxes. Other clients left when UBS was forced to surrender 5,000 client accounts to the US government. Still more left when UBS had to close down its US offshore client business – well over 2,000 have closed their accounts over the last three years.

The ones who have stayed loyal to UBS are clearly unfazed by the odd scandal, said Scott of Vestra.

"There will inevitably be some movement from people who have been feeling nervous about the eurozone anyway. But a large exodus of clients from UBS is unlikely. Most of UBS' clients should by now be used to the bank being in the news for the wrong reasons. Unfortunately UBS has been hit by a number of scandals so this is not the first time in recent months its reputation has taken a battering,” he added.

Scott said that some clients will regard it as a criminal act that can happen and has happened to others before, while others will be placated by the fact that no client money is affected.

And some clients, like the entrepreneurs, ultra rich and family offices which operate more like mini institutions, will still find that UBS is one of the few banks to offer effective cross-collaboration between divisions - something tried by many but successfully implemented by few.

Better the devil you know

The second reason why clients may stick with UBS is their lack of alternatives. Christian Nolterieke, managing director of added that as far as private clients are concerned in today’s volatile environment, it is better the devil you know. “In the current tumultuous stage of the markets, all of UBS’ competitors are subject to bad news for one reason or another. At least UBS is not in the headline as a potential candidate for bankruptcy.”

Equally, the practical implications will dissuade many. Changing bank accounts is a big hassle. If there is little to distinguish one troubled bank from another, why go through the time and energy spent on changing your account?

The shrinking investment bank

Savvy clients may also realise that in the long term the scandal will be good for the wealth management division.

Carsten Kengeter, head of UBS investment banking business, is planning to accelerate the overhaul of the non-core divisions and higher-risk activities like fixed income trading and equities, according to a report in the Financial Times.

Before the scandal broke, UBS had already started a review of its investment banking operations after a moribund set of first half results. It said in June that it intended to refocus on its private banking operations, and support its growing franchise in Australia and Asia. If the rogue trading saga prompts a faster overhaul of the investment banking activities it could prove pivotal in the progress of the wealth management unit, say analysts.

“The exit from non-core businesses within the investment bank, such as Delta One, could be accelerated, thereby reducing risks and freeing up capital. While we do not advocate a complete separation of the investment bank, a more focused approach to client flows, wealth management and capital . . . could be implemented,” said analysts at Swiss bank Vontobel.

Others say the investment and private banking divisions could be separated as a result of the saga. Switzerland's two biggest political parties, the Swiss People's Party and the Social Democrat's Party, are lobbying the bank to split the divisions. 

“Looking back, the investment banking unit has brought UBS only billions and billions of losses and so much bad press in the last decade. The sooner UBS focuses purely on its core competence and brand of wealth management the better,” said Nolterieke.

Still, it’s an expensive learning curve.