UBS SHOULD quit investment banking. Not because it is inherently risky, nor because regulators or politicians say so. It should shut – or at least dramatically shrink – the investment bank because it isn’t very good.
Consider this: since the start of 2009, the investment bank at UBS has only posted a pre-tax operating profit in excess of $1bn on three occasions: the first quarter of 2010 ($1.4bn); the second quarter of 2010 ($1.5bn); and the first quarter of 2011 ($1bn) (see graph bottom right).
In the first three quarters of 2009 it posted combined losses of around $7bn, while it also made a loss of $460m in the third quarter of 2010.
In the remaining four quarters, it made a combined profit of just $874m. Over the entire period, it lost $2.6bn.
Of course, it will post a loss yet again in the third quarter following the $2.3bn rogue trading hit, which will also wipe out profit at group level (estimated at $1.5bn).
But the point is the investment bank would have been unable to withstand a writedown of this magnitude at any point in the last ten quarters.
Oswald Grubel, the bank’s chief executive, has said rogue trades are unavoidable. “If someone acts with criminal energy, then you can’t do anything. That will always be the case in our business.”
So the investment bank can’t avoid trading losses of this kind. Nor can it make enough money to offset them. It doesn’t sound like this investment banking lark is going to work.
Worse still, the reputational damage will infect its core wealth management and private banking businesses. Net new assets only turned positive towards the end of last year, as wealth clients dipped their toes in the water following the financial crisis and US tax probe. This latest scandal is likely to send them running for the hills once more.