UBS universal bank model breaks, rivals defiant

LONDON (Reuters) - UBS's (UBSN.VX) blunt admission that its universal banking model blurs risk, adds complexity and can eat up capital will put pressure on rivals with a similar strategy to reassess their future.

But it was more UBS's failure to put sufficient risk controls in place that did the damage, than shortcomings of the model, which has also been adopted by the likes of Credit Suisse (CSGN.VX), HSBC (HSBA.L) and SocGen (SOGN.PA).

"It failed for them," said David Williams, bank analyst at Fox-Pitt, Kelton. "They (UBS) didn't have the necessary safeguards, protections and strategic oversight of what they were doing, and that's required them to go for a much more effective separation of the business units."

UBS -- Europe's biggest casualty of the credit crunch -- said on Tuesday it will separate its wealth management arm from its troubled investment bank, which analysts expect to lead to a spin-off or sale of the latter.

"Our review has clearly revealed the weaknesses associated with the integrated "one firm" business model," said Peter Kurer, UBS chairman.

The universal model spans retail and investment banking and can include insurance, fund management and other areas. But big investment banking losses during the credit crunch of the past year have prompted calls for a rethink.

Kurer admitted the model blurred the risk-reward profile of individual business.

Cheap funding provided by lavish income from its wealth management arm and a lack of oversight allowed UBS's investment bank to build up huge trading positions, which left it nursing writedowns of $42 billion when they soured.

U.S. bank Citigroup (C.N) has also faced criticism it is too unwieldy and UBS acknowledged the problem, saying the integrated model added "unnecessary layers of complexity".

MILLIONAIRES DEFECT

Perhaps the biggest problem is that bad publicity about its investment bank damaged UBS in the eyes of its rich clients, who prize low-profile stability.

Almost 44 billion Swiss francs ($40.48 billion) flowed out of its wealth business in the second quarter alone.

Millionaire clients are more important for UBS than any other large bank in the world. Wealth management contributes some 40 percent to its profits, compared to 35 percent at Credit Suisse and 30 percent at Deutsche Bank (DBKGn.DE).

Other universal banks have much lower shares, according to data from Scorpio Partnership, a consultancy, with private banking at HSBC making up only 6 percent of profit.

That may explain why HSBC was one of a trio of European banks to defend the integrated model just last week.

"The universal bank will come out of this crisis as the winner," said SocGen CEO Frederic Oudea. Barclays also dismissed suggestions the credit crunch left the model broken.

But heavy tweaks of the model were sometimes needed to enable the banks to make such positive sounds.

HSBC last year scrapped a five-year plan unveiled in 2003 to take on Wall Street's biggest banks in investment banking, focusing on emerging markets and financing.

Most banks, already uneasy about huge bonuses for top bankers and volatile earnings, will likely scale back in capital markets after their recent losses.

Citi's new CEO plans to shrink the balance sheet and sell legacy assets and non-core businesses, but reckons there's life in its model and plans to bring businesses close together.

Others, like Royal Bank of Scotland (RBS.L), are also shedding assets held by their investment banks.

And Credit Suisse, which has been publicly propagating its one-bank model, may still find itself into trouble.

"They may have created a hostage of fortune by promoting their one bank model when UBS was having their trouble," cautioned Ted Wilson at Scorpio Partnership.

And even if UBS did hive off its investment bank, not all its problems would be solved, because it might forego cost savings and revenue benefits.

"Historically, UBS argued that 10-15 percent of market capitalization came from one group synergies," said Kian Abouhossein, analyst at JP Morgan, estimating 2.5 billion francs in revenue benefits and 1.5 billion in cost synergies.

(Additional reporting by Douwe Miedema; Editing by Hans Peters)