UBS listening to shareholders on wealth management split

A powerful shareholder thinks UBS should hive off its investment bank. Given the recent stellar performance of the company's wealth management business, this isn't such a whacky idea.

UBS AG (UBSN) is always looking at all shareholder suggestions, Chief Executive Officer Sergio Ermotti said, a day after investor Knight Vinke Asset Management LLC called for a spinoff of the lender’s investment bank.

“We’re taking the input and suggestions of every shareholder always very carefully,” Ermotti, 52, told Bloomberg News in an interview at a conference in St. Gallen, Switzerland Friday.. “Yesterday was a good opportunity for all our shareholders to come to the AGM and voice their opinions.”

Ermotti’s comments come a day after New York-based Knight Vinke said in an open letter to shareholders before UBS’s annual general meeting that ownership of the investment bank, which “nearly destroyed UBS” during the financial crisis, could be transferred to employees and managers. In 2011, a $2.3 billion loss from unauthorized trading at the unit led to the exit of former CEO Oswald Gruebel, three years after the bank received a government bailout to ward off a collapse.

UBS shares rose 0.4 percent to 16.85 Swiss francs at 4:20 p.m. in Zurich. They have gained about 18% this year, trailing Credit Suisse Group AG’s 24% increase.

Knight Vinke, led by founder Eric Knight, targets large, publicly traded companies and seeks to recruit other institutional investors to press the companies’ management to change course. In 2007, the firm said that HSBC Holdings Plc (HSBA), Europe’s largest bank, misled investors about a new share plan payable in 2008 to reward management.
‘Serious Threat’

The firm wrote in the letter that it questions “the merits of keeping the investment bank under the same roof as the wealth management and Swiss banking businesses.” Investment banking “is a very risky business,” which poses “a serious threat.”

No Knight Vinke representative spoke publicly at Thursday’s shareholder meeting in Zurich and the proposal to split off the investment bank wasn’t discussed. The firm says it owns almost 1% of UBS shares.

Ermotti announced plans last year to eliminate 10,000 jobs and exit most debt-trading businesses to concentrate on money management and boost profitability. UBS this week posted first- quarter earnings that exceeded analysts’ estimates.
Pay Structures

The investment bank posted a 92% gain in first-quarter pretax profit to 977 million francs ($1 billion), UBS said on April 30. That was more than triple the average analysts’ estimate of 321 million francs. The unit had a pretax return on equity of 49.5% for the quarter, up from 17% a year earlier.

The lender has changed its pay structures, limiting cash payouts, after almost 37% of shareholders voted last year against its 2011 compensation report. Thursday, the 2012 report was approved with 83% of the votes.

“Clearly our shareholders understand that we’re fixing past mistakes in a critical and constructive way, but the firm also needs to look forward,” Ermotti said Friday. “We’re pleased with the recognition of our shareholders for these efforts.”

Ermotti, who was appointed CEO in November 2011, said later during a panel at the conference that had UBS introduced its current pay structure in 2004 or 2005, it would “most likely” not have needed the bailout as claw-back provisions are linked to long-term performance.

“The real problem is to make sure that people are paid for sustainable performance,” Ermotti said. “And you can only measure sustainability over the next at least three to five years.”
— Bloomberg News —