UBS universal bank model breaks, rivals defiant

By Steve Slater - Analysis

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.