Is Oswald Grübel So Bad After All?

This week UBS had its investors’ day and CEO Oswald Grübel laid out his strategy going forward. Moody’s, just one day later, has downgraded various ratings of UBS. The majority of analysts also keep their negative outlook on UBS. The negative pundits make the following points:

• UBS may have gotten rid of the worst risks from subprime mortgage products but this does not automatically mean that the future is bright
  

• Net new money is still negative, i.e. clients (private and institutional) are voting with their feet against UBS
  

• Reputation of the wealth management division is shattered and will remain so for many years to come
  

• UBS has to hire new senior management and offer them very generous pay packages increasing cost pressure
  

• Investment banking will, according to Grübel, remain a building block of the future success of UBS – a high risk given UBS’ track record in investment banking, especially in the fixed income division
  

• Grübel has no new strategy. He is just a talented cost-cutter.
  

On the surface these points look quite convincing, especially in the light of more than CHF 1 billion of losses in Q3 2009 (many other banks have made healthy profits during the same period). But while it is easy to criticize UBS, the case is nevertheless doubtful. UBS has indeed made a lot of progress and it is not so unlikely – a few years from today – that UBS will be quite profitable and healthy again.

• First and foremost, Grübel has made an excellent job of reducing the risk threatening the very existence of UBS. For instance, the balance sheet is down from CHF 2.5 tr to CHF 1.5 tr. Tier 1 risk ratio is at 15% - beating most of UBS’ competitors.
  

• Grübel has reduced the cost base to healthy levels. Yet the biggest portion of the impact will become only visible in 2010. Since September 2008 headcount has been reduced by 13% or more than 10’000 full time equivalents.
  

• It is correct that net new money is still negative. The total of the net outflows since beginning of 2008 add up to around CHF 250 bn. However, this is less than 10% of total assets under management back in 2008. It is definitely painful but hardly Armageddon. UBS remains the second largest wealth manager by assets under management second only to the combination of Merrill Lynch and Bank of America.
  

• Investment banking and all other divisions are already profitable on an operational level in Q3 (ignoring the non-cash own-credit charge). The wealth management divisions generated a profit of almost CHF 1 bn.
  

• Grübel may not have the grand strategy going forward yet, but his job number one right now is to de-risk and de-leverage the bank in combination with vigorous cost cutting. Looking at the aforementioned numbers he has done an excellent job
  

• After UBS took the first heavy hits concerning offshore money the company was one of the first to start cleaning up their act. While a lot of the competitors are just about to start rather frantically to address these issues UBS wealth management is already one step ahead.
  

• Oswald Grübel is a man who polarizes. However, not matter if you like him or not, his track record at Credit Suisse proves his ability to turn a bank around and to develop a successful strategy.
  

There is no doubt that it will take time to repair the loss of reputation UBS has suffered. But the company still has a huge franchise that is positioned well across the globe (including all emerging markets) and will be a much leaner and meaner player in the future. The negative pundits may face a rude awakening. But what the hell, they were unable to predict the downfall of UBS correctly (looking especially at the rating agencies) why should they be right with the rise after the fall?