UBS CEO Oswald Gruebel will ask the board of the Swiss financial giant to back his leadership and keep its investment bank after a $2.3 billion loss blamed on a rogue trader piled pressure on him to scale back or even split off the division.
Gruebel will stress to the board of directors this week in Singapore that he wants the investment bank to remain part of the group's business alongside wealth management, sources told Reuters Thursday.
"UBS wants to have an integrated banking model," a source close to the bank said. "It is a consistent message the CEO has been delivering."
A second source said Gruebel also delivered the same message to senior Asian executives of the bank before the senior managers met Wednesday.
"One incident doesn't mean UBS will rush to sell the investment bank," a source who attended one of the meetings told Reuters.
UBS trader Kweku Adoboli was last week charged with fraud and false accounting dating back to 2008 over the losses, prompting criticism of the bank's control mechanisms and integrated business model.
The board of directors meets Thursday and Friday, one of four regular meetings per year, and timed to coincide with the Singapore's Formula One motor racing Grand Prix, where UBS is a major sponsor.
Gruebel told Reuters in Singapore Wednesday that he had the support of the bank's board ahead of its first meeting since announcing the loss.
The bank is widely expected to speed up an overhaul of its investment bank that had been planned for announcement at a Nov. 17 investor day. Big shareholders have signaled they could wait until then while the bank completed an internal investigation, another source at the bank said.
"The view from the board is very clear. Investment banking is a very important and critical part to the overall strategy together with the wealth management," said a third source.
"This one incident is annoying, it is very annoying, but that's not going to change the overall strategy."
INVESTMENT BANKING CRITICAL
UBS' trading loss could have wider repercussions for the global banking industry, which is already struggling with Europe's debt crisis and fears that the U.S. economy could slip back into recession.
"We are at unprecedented times right now in terms of events, especially in Europe, especially with regard to the revenue slowdown in the United States," CLSA analyst Mike Mayo told Reuters Insider TV.
"And you take that combination with risk failures and it creates a very flammable environment where it just adds to the volatility."
Gruebel was likely to cite progress made under his leadership in cutting risk-weighted assets by a third since the end of 2008, in boosting the bank's capital ratio and cutting headcount by 16 percent.
Client inflows have turned positive, but analysts warned the latest rogue trading incident raises the risk of reversing that trend.
"The best signal to the market would probably be for UBS to let go of Carsten Kengeter, who as CEO of IB [investment banking] is ultimately responsible for the losses," said Cheuvreux banks analyst Christian Stark. "It would also send a signal that the board realizes having made mistakes in aggressively rebuilding IB and make any commitments to downsize IB appear more credible."
Singapore sovereign wealth fund GIC, which is UBS's biggest shareholder at 6.4 percent, publicly expressed disappointment and concern at the "lapses," adding pressure on Gruebel to restore confidence.
GIC has lost more than half of its investment in UBS since it bailed out the Swiss wealth manager in 2007.
An executive at UBS shareholder Threadneedle Investments said Thursday there was no need for the bank's chairman or CEO to resign over the rogue trader incident, but said the bank should change its investment banking business model.
"It's a very high-quality business with a terrific reputation, but it's been tarnished by inability to manage the risks," said Leigh Harrison, Threadneedle's global equities head.
"I think withdrawing from every part of investment banking business probably does not make sense. What sort of investment bank does UBS want to be in? It doesn't have to be in every part of investment banking," Harrison told Reuters on the sidelines of a business event in Taipei.
Gruebel had been expected to scale back proprietary trading and fixed income operations, but not do away with them completely.
Gruebel, a gruff 67-year-old German who previously ran Credit Suisse , was brought out of retirement in 2009 to help clean up UBS after huge losses on subprime mortgage assets forced the Swiss government to bail out the bank.
He initially indicated he would only stay in the job for a couple of years to get the bank back on its feet but suggested recently that he could stick around at least until former Bundesbank boss Axel Weber takes over as chairman in 2013.
UBS has been grooming Sergio Ermotti, the former deputy chief executive of UniCredit who joined the bank as Europe, Middle East and Africa chief in April, but until the scandal Gruebel had signaled that he was in no hurry to go.
(Reporting by Emma Thomasson and Martin De Sa'Pinto in Zurich; Saeed Azhar, Harry Suhartono and Eveline Danubrata in Singapore and Faith Hung in Taipei; Editing by Kim Coghill and Lincoln Feast)