UBS to Split Investment Bank From Wealth Management After Loss

By Elena Logutenkova

Aug. 12 (Bloomberg) -- UBS AG, Switzerland's biggest bank, announced plans to separate its investment banking and wealth management units after a fourth straight quarterly loss caused by subprime-related writedowns.

UBS rose as much as 3.8 percent in Swiss trading after Chairman Peter Kurer said today that the Zurich-based bank will give its three business divisions greater autonomy to increase ``strategic flexibility.'' The decision adds to speculation the company may jettison the securities unit, JPMorgan Chase & Co. analyst Kian Abouhossein said in a note to clients.

Kurer is abandoning his predecessor Marcel Ospel's push to integrate the divisions after record losses at the securities unit led to net withdrawals from the private bank for the first time in almost eight years. UBS, the European bank hardest hit by the collapse of the U.S. subprime mortgage market, has faced calls from investors including former president Luqman Arnold to split off the investment bank.

``They bought themselves some time,'' said Joerg de Vries- Hippen, who oversees about $26 billion, including UBS stock, as chief investment officer for European equities at Allianz Global Investors in Frankfurt. ``By separating the business units they are showing that they are listening to investors but not going as far as breaking up the universal bank business model.''

UBS rose 22 centimes, or 1 percent, to 23.40 francs by 10:31 a.m. The stock is down 49 percent this year, the fourth-worst performance on the 71-company Bloomberg Europe Banks and Financial Services Index.

`New Problems'

The bank reported a second-quarter net loss of 358 million Swiss francs ($329 million), compared with a 5.55 billion-franc profit a year before, and said it doesn't expect the ``adverse economic and financial trends'' to improve in the second half. About 3.8 billion francs in tax credits cushioned the loss.

``There are constantly new problems coming up at the investment bank and this is really taking a toll on the core wealth management franchise,'' said Florian Esterer, who helps oversee about $63 billion at Swisscanto Asset Management.

Rich clients at UBS's wealth management units withdrew 17.3 billion francs more than they added in the quarter, triple the 5 billion-franc estimate of analysts. The division, which oversaw 1.84 trillion francs at the end of March, attracted an average of 37.9 billion francs in each quarter last year.

Pretax profit at the wealth management international and Switzerland unit fell 11 percent to 1.27 billion francs, while wealth management in the U.S. had a pretax loss of 741 million francs on provisions to settle a U.S. probe into auction-rate securities. The investment bank had a loss of 5.23 billion francs after about $5.1 billion in writedowns. The bank said it will continue to reduce staffing, costs and risky assets.

`Pressure' to Continue

``The measures we announced today will not fix our reputational challenges overnight,'' Chief Financial Officer Marco Suter said at a news conference. ``Therefore we expect the pressure on net new money to continue in the short term.''

UBS announced today that John Cryan, currently head of the financial institutions group at the investment bank, will replace Suter, 50, as CFO. The bank hired Markus U. Diethelm from Zurich- based Swiss Reinsurance Co. as group general counsel.

Chief Executive Officer Marcel Rohner, 43, and Kurer, 59, have announced plans to cut 5,500 jobs, including 2,600 at the securities unit. Abouhossein at JPMorgan said last week that UBS should eliminate an additional 15 percent of the investment bank's more than 21,000 employees.

`Talent' Rushing Out

UBS brought in Jerker Johansson, 52, from Morgan Stanley in mid-March to run the division. A mistimed bet on the U.S. mortgage market led to more than $38 billion in writedowns at the securities unit in the nine months through March, and 25.4 billion francs of net losses, the most of any bank. UBS raised more than 30 billion francs from investors to replenish capital eroded by losses.

The company's private banking business has struggled to stem defections among advisers and wealthy clients, even as Zurich- based Credit Suisse Group AG and Julius Baer Holding AG have attracted more funds and stepped up hiring. UBS announced yesterday that five people from its Zurich-based unit that services U.S. clients resigned.

``Talent in private banking is rushing out the door to competitors who are taking advantage of the bank's difficult situation,'' said Bernhard Bauhofer, the founder of Wollerau, Switzerland-based consulting firm Sparring Partners GmbH and author of ``Reputation Management.''

Credit Suisse's wealth management unit added a net 15.4 billion francs in the second quarter, the most in two years, after hiring 120 advisers in three months. Julius Baer said wealthy clients invested 8 billion francs in the first half as 49 new relationship managers joined the firm.

Regulatory Probes

UBS's management has also been grappling with regulatory probes in the U.S. The bank said last week it will buy back as much as $18.6 billion of auction-rate securities and pay $150 million of fines, the largest settlement in a U.S. investigation into whether banks stuck clients with hard-to-sell bonds. The bank set aside about $900 million in the second quarter to account for the settlement.

UBS is also under investigation in the U.S. over whether it helped clients evade American taxes. The bank said last month it will stop servicing accounts for American clients at units that aren't licensed in the U.S., in response to an Internal Revenue Service summons for customer information as part of the tax probe. The Swiss Finance Ministry is evaluating whether UBS should go along with the IRS's request.

Dillon Read

UBS was among the first stung by the subprime contagion when its Dillon Read Capital Management LP hedge fund, run by former investment banking chief John Costas, 51, lost 150 million francs in the first quarter of last year. By May that year, UBS decided to close it, and in July CEO Peter Wuffli, 50, stepped down.

Losses also led to the departures of executives including finance chief Clive Standish, 55, and Huw Jenkins, 50, the head of the investment bank. Ospel, 58, resigned in April after shareholders demanded he take responsibility for the bank's woes.

Financial institutions worldwide have reported about $493 billion of writedowns tied to the collapse of the U.S. subprime market, and turned to investors for $353 billion of capital, data compiled by Bloomberg show.

Kurer, in response to criticism from investors including former Arnold, 58, pledged to review the bank's business model and bring more financial experts onto the board of directors.

UBS today said it will propose the election of Sally Bott, BP Plc's group human resources director, Rainer-Marc Frey, founder and chairman of Horizon21, Bruno Gehrig, chairman of Swiss Life Holding AG and William G. Parrett, former CEO of Deloitte Touche Tohmatsu to the board of directors.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net