UBS Aims to Improve
Risk Management

ZURICH -- UBS AG, among the worst hit banks in the subprime-mortgage meltdown, has initiated a massive overhaul of its struggling investment bank to get a better grip on spiraling risks and costs, and protect its balance sheet.

"These important initiatives will allow us to maximize synergies between our businesses," Chief Executive Marcel Rohner said in a memo obtained by Dow Jones Newswires Friday. "I am confident the changes will also enable us to better leverage our core strengths within the investment bank."

UBS said the revamp is primarily aimed at increasing efficiency and improving relationship with clients, and could entail more job cuts, as the bank folds units together and pools funds to better assess risks. UBS last year announced 1,500 layoffs at its investment bank in the wake of $14.2 billion in charges on its subprime holdings that are likely to lead to a full-year net loss for 2007.

The bank said Friday it also will speed up the exit of unprofitable business areas and discontinue risky and volatile operations, such as its proprietary credit operations in the U.S. or involvement in some commodity areas.

UBS is trying to protect its balance sheet with these measures as it will allocate less capital to risky business. This is crucial for the bank which, as the world's largest wealth manager in term of assets under management, is forced to have high capital levels to attract wealthy clients.

"This memo tells us that UBS is continuing with the job cutting and restructuring exercise it started in the fourth quarter," a London-based banking analyst said. "This exercise will likely be repeated elsewhere, which suggests that we will see more of these announcements across the industry, and not just at UBS."

The plight of UBS is shared by many industry peers and more job losses are expected, especially in Europe, where the crisis has so far mainly centered on UBS.

U.S. banks such as Lehman Brothers Holdings Inc., Citigroup Inc. and Bank of America Corp. have made massive job cuts and many have been forced to take up fresh capital. European competitors such as HSBC Holdings PLC -- and to a lesser extent Dresdner Kleinwort, a unit of German insurer Allianz SE, and France's Societe Generale -- have also scaled down their employee base but are expected to announce further cuts.

UBS said that as part of its latest initiative it has created a real-estate "workout group" that will pool the bank's mortgage-backed securities and credit default obligations as well as asset-backed securities. "This team will be primarily responsible for developing exit strategies for our existing portfolio through market alternatives and innovative structured solutions," Mr. Rohner said. "Our aim is to reduce exposure to this asset class in an orderly manner while minimizing further downside risk."

Despite the bank's massive write-downs late last year, UBS still owned about $29 billion in subprime holdings in December. This high level of exposure has led several analysts to believe that the bank could be forced to take more charges later this year. Estimates for the additional write-downs range from between $4 billion to about $7 billion. UBS repeatedly declined to comment on these speculations.

As part of the overhaul, UBS will also tackle other departments such as its commodities trading business, where it will discontinue certain power and gas markets in Europe and reduce its presence in Canada. Its credit market business will be streamlined, bringing the bank's investment-grade, loan-sales and trading and high-yield businesses closer together, UBS said.

Mr. Rohner said he was confident the changes will take root and UBS has "an exceptional foundation on which to grow," but he remained silent on the company's profit and growth prospects of 2008.

Despite the recent measures, UBS still faces an uphill battle. The bank needs to win shareholder approval to back a 13 billion Swiss francs ($11.8 billion) capital increase that will be funded by government-controlled Singapore Investment Corp. and an unnamed Middle East investor. Several activist shareholders have criticized the transaction for having bypassed existing shareholders from participating in the lucrative issue of new shares. Criticism will likely center on long-standing Chairman Marcel Ospel, who some see as the main culprit for the bank's troubles. Former Chief Executive Peter Wuffli left the bank last year.

In addition, concerns about more write-downs remain alive as the subprime-mortgage crisis is far from over and as it risks affecting other market segments, analysts say. UBS itself recently said that while it was confident in a turn around soon, it was difficult to predict the outcome of the current crisis.

All of this has kept UBS shares under pressure over the past months. Shares fell 1.1% to 44.98 francs, adding to this year's 13% drop. In 2007, UBS shares lost 29%.

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