Swiss bank UBS came under increasing pressure to shrink or sideline its investment bank business -- source of a $2 billion rogue trading loss -- as ratings agencies warned lax risk management could prompt downgrades.
The bank is expected to announce a major restructuring involving the loss of thousands more jobs at an investor day in New York on November 17, the Tages-Anzeiger newspaper said on Friday, as it seeks to reassure private clients.
Analysts said the massive loss, announced on Thursday, was the final nail in the coffin for UBS' investment bank which has struggled, like others in the industry, against falling markets and tough new regulation as well as the soaring Swiss franc.
The Swiss People's Party, the country's biggest and a member of the ruling coalition, wants UBS to split off its investment bank from its wealth management arm and pressure for it take radical action is likely to mount in the wake of the scandal.
A UBS spokesman declined to comment.
We expect UBS will come under material pressure from shareholders and FINMA to review its investment bank business ... the trading loss being the final straw, leading to material restructuring, said JP Morgan analysts in a note.
Ratings agencies Standard & Poor's, Fitch and Moody's all put the bank's credit rating on negative watch.
Fitch said the incident strengthens the arguments for UBS to down-scale its investment banking unit while S&P added: The loss is a setback to UBS' efforts to rebuild its reputation and demonstrate strengthened risk management following its weak performance in 2007-2009.
UBS is currently undertaking a strategic review of the size and shape of the investment bank division and we consider that the trading loss may influence the outcome of this process, it added.
The $2 billion that UBS said had been lost by a London-based trader in rogue dealing effectively canceled out the first year of savings from a recently-announced cost-cutting plan involving the loss of 3,500 jobs.
We believe that yesterday's event could have personnel consequences on senior management level, which in turn could lead to adjustments to UBS' business portfolio, said Vontobel analyst Teresa Nielsen.
The exit from non-core businesses inside the investment bank could be accelerated.
London police are still holding the suspect they arrested in the early hours of Thursday on suspicion of fraud. Sources close to the situation named the suspect as 31-year-old Kweku Adoboli, a UBS director of exchange traded funds.
UBS declined to give any new information on the case early on Friday. London police also declined to comment but will have to charge, bail, release or formally extend the detention of the suspect later on Friday.
UK law firm Kingsley Napley has been hired to represent Adoboli, a spokeswoman for the company confirmed. The firm also advised previous rogue trader Nick Leeson, whose $1.4 billion derivatives losses triggered the collapse of Britain's Barings Bank in 1995.
Most market speculation circled around the possibility that Adoboli was caught out by the shock decision by the Swiss central bank last week to impose a cap on the soaring franc, sending the currency plunging nearly 9 percent.
Need a miracle, Adoboli wrote on his page on social networking site Facebook that day, according to media reports.
A UBS spokesman would only say that the losses were made in equities, without elaborating.
HISTORY OF MISHAPS
UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches followed by repeated pledges to fix risk systems.
Britain's Financial Services Authority and Switzerland's FINMA markets regulator were both in close contact with the bank, spokesmen said.
Chief Executive Oswald Gruebel, himself a former trader who was brought out of retirement in 2009 to try to turn UBS around, is reviewing the size and structure of the investment bank, particularly its fixed income division, after he was forced to pull back from ambitious profit targets.
In a Sunday newspaper interview before the scandal broke, Gruebel said how the bank would be restructured depended on how Swiss regulators planned to implement tough new capital standards that parliament is expected to approve next week.
What is clear is that we must become more efficient. That will prompt major criticism because of reductions, offshoring, outsourcing of jobs and activities, he said.
UBS stock, which fell 10.8 percent on Thursday to end at its lowest close since March 2009, was up 3.6 percent at 10 francs by 1031 GMT compared with a 1.8 percent stronger European banking sector index.
New losses in UBS's investment bank risk scaring rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world's biggest wealth manager but has slipped to third place.
The concern from the wealth management client's point of view is that if UBS cannot even manage their own proprietary trading positions, how can the client expect UBS to manage money on his or her behalf, said Melvyn Teo, professor of finance at Singapore Management University.
If UBS management takes quick proactive steps to address the risk management problems, the impact on their wealth management division will be minimal.
The suspect's father, John Adoboli, a retired United Nations employee from Ghana, said he knew finance was a high risk area but he had no doubts about his son's integrity.
From what the reports are saying, it could be that he made a mistake or wrongful judgment, he told Reuters by phone from the Ghanaian port city of Tema.
($1 = 0.870 franc)
(Additional reporting by Steve Slater and Huw Jones in London, Kwasi Kpodo in Accra and Kevin Lim in Singapore; Editing by Sophie Walker)