UBS ponders moving businesses from Switzerland

UBS CEO Grübel is eyeing greener pastures Keystone

UBS says it would consider moving parts of its business away from Switzerland if tough new Swiss regulations leave the bank at a competitive disadvantage.

This content was published on February 8, 2011 - 15:40

The Swiss bank could relocate its risky investment banking operations to a more relaxed regulatory environment if proposed Swiss rules are significantly more stringent. The proposals were aired as UBS announced its first full year of profits since 2006.

UBS chief executive Oswald Grübel complained on Tuesday that in the future there would probably be an uneven playing field in the global banking regulatory system. Different countries are applying their own set of rules to help avoid another financial meltdown – with Switzerland setting the most demanding conditions.

While traditionally setting tougher requirements than the international field, the latest so-called “Swiss finish” proposals demand that UBS and Credit Suisse set aside nearly three times the global standard of capital reserves to buffer against risk.

To soften the impact of such an onerous obligation, Grübel has suggested moving the group’s investment banking division to another country, taking its risky assets and trades with it – outside of the Swiss regulatory sphere.

No break up

“If the capital requirements in other countries are only half of those in Switzerland - and we think we have to stay in certain businesses - then we may have to operate them out of these countries,” Grübel said at the bank’s annual results press conference.

“If there is a demand from clients, in wealth management for example, for these kind of [risky] assets [generated by investment bankers], then we would have to offer them elsewhere [than Switzerland].”

While suggesting Britain or the United States as possible destinations, Grübel acknowledged that it would take several months before the exact scale and scope of global banking regulations are known.

It will take the best part of the year for the “Swiss finish” proposals to pass through parliament, for example.

Grübel intimated that the move would not result in the UBS group splitting up or the dissolution of its vaunted “one bank” strategy that demands close cooperation between divisions.

But he would not elaborate on how an entire division could ring fence its risky assets from the Swiss regulator while maintaining its place in the group as a whole.

The best he could offer was that investment banking could operate as some sort of unspecified legal entity or subsidiary in another country. “At the moment we run businesses in different countries on a branch basis – tomorrow it could be on a subsidiary basis,” he said in response to a question from

Black figures

In the meantime, UBS has taken a significant stride towards putting its past problems behind it by reporting a full year profit in 2010 for the first time in four years.

Net profit for 2010 was SFr7.2 billion ($7.55 billion) compared with a loss of SFr2.7 billion in 2009.

UBS reported net profits in the fourth quarter of 2010 of SFr1.29 billion. The group also showed signs that assets were returning with net new money inflows of SFr7.1 billion in the last three months of the year.

Ultra high net worth clients (the extremely wealthy) and institutional investors particularly in Asia more than balanced out continuing numbers of customers withdrawing their assets in Europe.

The bank will recommend to shareholders another year of zero dividend payouts. Bonuses were slashed 10 per cent  from SFr4.8 billion in 2009 to SFr4.3 billion last year as it kept fixed costs down to SFr20 billion.

 “While we made substantial progress in 2010, we are fully aware that we have to continue to improve our results,” Grübel said on Tuesday. “There are still a lot of challenges. We are not yet meeting the high standards that we want.”

Legal headache

The US may well end up offering refuge from stricter Swiss regulations, but not from lawyers.

Results were hit by a SFr230 million provision set aside to deal with legal action is mainly to deal with claims in the litigation-friendly US.

UBS was forced last year to reveal the names of thousands of wealthy clients to the US tax authorities after admitting that it advised clients on how to dodge taxes. Some of those clients have already hinted that they intend to sue the bank for giving advice that got them into trouble with the tax authorities.

In addition, the US courts have begun ordering UBS to buy back some toxic assets that were deemed to have been mis-sold to clients.

Swiss Finish

Under the requirements of the proposed Swiss Finish, UBS and Credit Suisse must put aside a bigger buffer to cover their risks.

The proposed new global regulations, Basel III, demand a buffer of 7% of risky assets.

UBS and Credit Suisse must build their safety net to 19% - 10% in the form of the safest and most liquid equity and 9% in coco bonds.

These new bonds would allow the banks to raise money from the private sector in exchange for shares at a pre-set trigger point if conditions deteriorate.

There are also limits on the amount banks can borrow to fund trading activities.

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UBS turnaround

UBS was the worst hit European bank from the subprime mortgage crisis, writing down some $50 billion between the end of 2007 and 2009.

The year 2008 proved to be the bank’s worst on record, with annual losses of SFr21 billion.

Between 2008 and 2010, UBS lost well over SFr200 billion in combined net outflows as wealthy individuals and institutions lost faith in the bank. In 2010 these amounted to SFr14.3 billion of withdrawn net assets.

UBS was further hit by a US tax evasion probe that cost a $780 million fine in 2009. In addition, the bank was forced to break the Swiss banking secrecy code by handing over the confidential details of thousands of clients.

The Swiss parliament ratified a deal last year between Switzerland and the US that allowed UBS to hand over confidential client data without facing prosecution in its home country.

There are signs that wealthy clients are returning their money to UBS, led mainly by Asia, but continuing tax evasion probes in Europe have resulted in huge outflows.

In September, UBS embarked on a rebranding operation in an effort to persuade customers that the worst of its problems was over.

But bottom line is what counts, and a full year of profits may go further to persuading investors that UBS’s house in back in order.

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