Following regulatory probe into major banks of the UK, the U.S., the European Union and Switzerland relating to the manipulation of foreign-exchange markets, UBS AG announced the restructuring of its foreign exchange business. Notably, at least six regulatory authorities around the globe, including the US Department of Justice, the European Commission and the Hong Kong Monetary Authority, are investigating the alleged manipulation of currency markets.
Investigators are examining the possible transfer of information by traders from one bank to another through electronic medium. Further, suspicion lingers around certain traders using information regarding large trade orders from customers to manipulate rates. Along with UBS AG, other global banking behemoths, such as Deutsche Bank AG , Credit Suisse Group AG , Citigroup Inc. and JPMorgan Chase & Co., have promised to cooperate with investigations related to foreign exchange trading.
UBS AG plans to combine its foreign exchange and precious metals business with its rates and credit unit. The new entity will be named FX, rates and credit (FRC) unit.
Further, as part of the reorganization, the global co-head of foreign exchange and precious metals – Chris Vogelgesang is stepping down and is expected to shift to some other unit of the bank. However, the new unit will be headed by Chris Murphy and George Athanasopoulos – members of the executive committee of UBS' investment bank.
The restructuring move is in tandem with UBS AG’s announcement of 10,000 job cuts last year as part of the company’s reorganizational efforts. With UBS AG facing crisis since the financial meltdown, besides incurring trading losses and outrage worth billions of dollars, the overhauling measures were aimed at developing its core businesses and downsizing the troubled segments.
The layoffs, which were designed by Chief Executive Sergio Ermotti, were aimed at decreasing risk-weighted assets and lessening the complexity of the company’s investment banking division. UBS AG had been trimming its investment bank since 2011 and intends to refocus on building its market-leading wealth management and asset management business.
Notably, UBS AG has been countering a faltering investment banking business with its performance registering a sharp decline over the past few quarters. The stressed environment and stricter capital norms have prompted the company to chalk out plans for rightsizing its business. Another Swiss Bank – Credit Suisse has also come up with a new unit to combine rates, foreign-exchange and commodities operations to increase returns.
With a bleak near-term outlook of an economic recovery, banks have been progressively adopting rigorous cost-cutting initiatives and various restructuring measures to maintain a sound capital buffer in order to withstand any financial crisis.
Overall, until revenue generation revives, a worsening cost-to-income ratio will continue to force many more banks to slash costs, since these need to enhance profitability in order to boost capital ratios.
Given the stressed operating environment, we believe that any considerable improvement in the earnings of UBS AG would remain elusive in the upcoming quarters. However, prudent business model changes can help improve efficiency and reinforce its competitive edge. Currently, UBS AG carries a Zacks Rank #3 (Hold).