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BW Businessworld

UBS $2-Bn Loss To Trigger Investment Bank Retreat

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Swiss bank UBS is expected to shrink its investment bank business -- source of a $2 billion rogue trading loss -- and could fire senior executives as it tries to retain worried private clients and avert a ratings downgrade.

Analysts said the massive loss, announced on Thursday, was the final nail in the coffin for UBS' investment bank which has struggled, like others in the industry, against falling markets and tough new regulation as well as the soaring Swiss franc.

The Tages-Anzeiger newspaper, citing UBS insiders, said the bank would announce a major restructuring, to include thousands more job cuts, at a planned investor day on Nov. 17. A UBS spokesman declined to comment.

"We expect UBS will come under material pressure from shareholders and FINMA to review its investment bank business ... the trading loss being the final straw, leading to material restructuring," said JP Morgan analysts in a note.

Late on Thursday, Moody's said it had placed the bank's long-term debt and deposit ratings on review for a possible downgrade, a further blow to the bank.

"The losses call into question the group's ability to successfully complete the rebuilding of its investment banking operations," it said.

The $2 billion that UBS said had been lost by a London-based trader in rogue dealing effectively cancelled out the first year of savings from a recently-announced cost-cutting plan involving the loss of 3,500 jobs. It had hoped to make an annual 2 billion Swiss franc ($2.3 billion) saving under the scheme detailed last month.

"We believe that yesterday's event could have personnel consequences on senior management level, which in turn could lead to adjustments to UBS' business portfolio," said Vontobel analyst Teresa Nielsen.

"The exit from non-core businesses inside the investment bank could be accelerated."

London police are still holding the suspect they arrested in the early hours of Thursday on suspicion of fraud. Sources close to the situation named the suspect as 31-year-old Kweku Adoboli, a UBS director of exchange traded funds.

UBS declined to give any new information on the case early on Friday.

History Of Mishaps
UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches followed by repeated pledges to fix risk systems.

Chief Executive Oswald Gruebel, himself a former trader who was brought out of retirement in 2009 to try to turn UBS around, is reviewing the size and structure of the investment bank, particularly its fixed income division, after he was forced to pull back from ambitious profit targets.

Gruebel had aggressively expanded the investment bank to almost 18,000 staff from 16,500 a year ago before global financial crises hit.

In a Sunday newspaper interview before the scandal broke, Gruebel said how the bank would be restructured depended on how Swiss regulators planned to implement tough new capital standards that parliament is expected to approve next week.

"What is clear is that we must become more efficient. That will prompt major criticism because of reductions, offshoring, outsourcing of jobs and activities," he said.

UBS stock, which fell 10.8 percent on Thursday to end at its lowest close since March 2009, was up 1.9 percent at 9.9 francs by 0735GMT in line with the same rise on the European banking sector index.

New losses in UBS's investment bank risk scaring rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world's biggest wealth manager but has slipped to third place.

The suspect's father, John Adoboli, a retired United Nations employee from Ghana, said he knew finance was a high risk area but he had no doubts about his son's integrity.

"From what the reports are saying, it could be that he made a mistake or wrongful judgment," he told Reuters by phone from the Ghanaian port city of Tema.

(Reuters)