UBS Investment Bank Faces Challenge to Recover

ZURICH (Reuters) - Swiss-based UBS UBSN.VX may be compromising the long-term future of its investment bank as it draws in its horns and counts the cost of a disastrous foray into structured finance.

After unveiling a $10 billion writedown this week on subprime exposures and an injection of capital from investors in Singapore and the Middle East, UBS has also slammed on the brakes at its investment bank, where the problems originated.

Analysts and investors are now wondering whether what looks like a dramatic loss of confidence in the investment banking unit could curb growth potential in a business in which boldness and opportunity-seeking are paramount.

UBS, which is hiking its Tier 1 capital to 12 percent in a 19.4 billion Swiss frmanc injection has ordered a halt to proprietary trading -- which involves investment banks committing their own money to investments and trading positions.

“They are taking a once bitten, twice shy approach and their confidence is clearly dented by this episode. People should not underestimate it,” said Kinner Lakhani, an analyst at ABN AMRO in London.

“... the approach of cutting costs and capital committed to the investment bank can lead to greater-than-expected losses in revenues,” said Lakhani.

UBS has been the biggest casualty so far among major European banks of the meltdown in U.S. subprime mortgages -- loans made to borrowers with poor credit histories.

The subprime debacle has set off a global credit crisis as banks work through their portfolios of mortgage-backed securities and take charges on any exposures that have been contaminated by subprime borrowers defaulting on loans.

UBS Chief executive Marcel Rohner told investors at an event in London that the investment bank was poised to recover after it made bets on securities, backed by U.S. subprime mortgages, which went dramatically wrong.

“We have the investment bank properly positioned for future success, we are well on track. We have achieved a lot on the balance sheet side,” said Rohner.

But analysts are not sure that the investment banking operation can hit its stride again any time soon.

“It will be investment banking with your hands tied behind your bank because you are having to operate with 50 percent more capital than the opposition and you are not allowed to do prop trading,” said Simon Maughan, an analyst at MF Global.

Rohner, who before taking over as CEO in July ran the Swiss bank’s huge wealth management franchise, has taken the investment bank under his wing since the departure two months ago of former head Huw Jenkins.

Rohner has declined to say when he will name a replacement.

UBS said in a slide at an investor presentation on Tuesday that it would “reduce balance sheet, funding and proprietary risk usage” in its investment banking operations.

The bank also said it saw emerging markets, structured credit, real estate finance and commodities as among its high-growth businesses.

Unlike its European peers, Credit Suisse CSGN.VX and Deutsche Bank DBKGn.DE, UBS UBSN.VX held on to billions of dollars worth of U.S. mortgage-backed securities which it repackaged as collateralised debt obligations (CDOs).

These CDOs, which many other banks swiftly got off their books and passed on to other investors, were sitting on UBS’s balance sheet when borrowers of U.S. subprime mortgages started defaulting en masse, triggering a collapse in the paper’s value.

Following this week’s writedowns, on top of $4.4 billion of charges in the third quarter, UBS still has $13 billion of risky “super senior” debt on its books.

Some investors are taking a more relaxed view of the investment bank’s woes.

“The reason why people own UBS shares is not the investment bank and its prop trading, it’s the private banking. The investment banking is a business which gets low share valuation and blows up regularly as you can see,” said Dirk Becker at Kepler Securities.

Editing by Elaine Hardcastle