UBS Restructures as Clients Flee

ZURICH (Reuters) – UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) will split off its investment banking unit that made it Europe's top casualty of the credit crunch — and scared off wealthy clients — a move that analysts said signals the sale of the beleaguered business.

The world's biggest banker to the rich gave in to shareholder pressure to restructure on Tuesday, admitting there were problems with its one-bank model as it reported fresh writedowns and clients withdrawals in the second quarter.

The Swiss bank also ushered in a new financial chief and members of the board in an attempt to rebuild confidence in Switzerland's once-solid banking system.

Investors welcomed the reorganization, saying it could ultimately lead to a break up of the bank, and its shares rose 2.4 percent to 23.74 francs by 0955 GMT, compared to a 0.3 percent weaker DJ Stoxx European banking sector .

“We believe UBS investment bank will be not fully owned and even potentially disposed of by UBS over the next two years,” said JP Morgan analyst Kian Abouhossein.

UBS Chairman Peter Kurer told a news conference that competitors were on the prowl for assets they could pick up cheaply in the global market slump, but he said the group was not for sale and had not received any formal offers.

“It might be that we keep or divest or enter into joint ventures or collaboration,” Kurer told journalists. “For the time being, there are no plans to divest.”

His remarks signify a major change for the bank, which has long stood by its strategy of running asset management, banking for the rich and investment banking together.

CLIENTS GET MORE NERVOUS

Helmut Hipper, a fund manager at shareholder Union Investment, said wealth management had fared worse than expected. “A big part of the money outflows were international,” he said. “The reputational problems are hitting home internationally.”

UBS said there had been net new money outflows of almost 44 billion Swiss francs ($41 billion) in the second quarter — compared with inflows of 34 billion francs a year earlier — and it racked up a further $5 billion in writedowns on investments. This took its total bill from the markets crisis to $42 billion.

UBS joins U.S. peers Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) in taking more big hits in the quarter from exposure to risky mortgage assets. They remain the three hardest hit banks and investors are still worried about yet more subprime costs.

UBS's admission that the one-bank model is broken comes just a week after rivals Societe Generale (SOGN.PA: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) and Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) all defended the model, which has been badly bruised during the credit crunch.

UBS has come under continued pressure from activist investor Olivant — headed by former UBS Chief Executive Luqman Arnold — to hive off investment banking, which has dented its wealthy customers' trust in the private bank.

The bank made a bigger-than-expected loss of 358 million francs in the second quarter and said finance chief, Marco Suter — an ally of former chairman Marcel Ospel who was toppled in the crisis — would go.

Last week it agreed to buy back almost $19 billion of bonds after U.S. authorities sued it for steering clients towards auction-rate securities — debt which became impossible to sell after the market froze. UBS said this would cost it $900 million.

UBS is also under fire from U.S. congressional investigators who say it helped U.S. clients dodge taxes, striking at the heart of Switzerland's prized banking secrecy rules.

But UBS's difficulties do not end there. It faces tough new rules later this year from the Swiss banking watchdog that will force it to hoard considerably more capital, putting a brake on capital-intensive investment banking.

The avalanche of problems has crippled the Swiss bank's stock. UBS's share price has tumbled by almost two thirds since the start of the year — twice that of European peers.

By John O'Donnell and Sam Cage

(Additional reporting by Albert Schmieder and Steve Slater in London; Editing by Louise Ireland)