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UBS May Not Be Working on Investment Banking Split After All

Tickers in this article: BCS UBS

NEW YORK (TheStreet) - Swiss banking conglomerate UBS may be "dusting off plans to dispose" of its investment banking unit, according to a strongly-worded research report released by Mediobanca analyst Christopher Wheeler on Thursday.

Upon further review, however, it's unclear whether UBS's long-speculated investment bank split-off is, in fact, being dusted off by the firm's senior management, which includes recently appointed CEO Sergio Ermotti and investment banking head Andrea Orcel.

"It is becoming clear that the Swiss government would like to continue to de-risk its bank sector and will continue to increase regulation. Against this background, we believe UBS are dusting-off plans to dispose of the Investment Bank, an initiative that is now possible given the earnings trajectory of the business," Wheeler wrote in a Thursday client note.

Wheeler, however, said in a follow-up email exchange with TheStreet that the genesis of his report was "the cold logic of the regulator hitting UBS with a capital surcharge in October and the Finance Minister suggesting a 6% to 10% leverage ratio may be appropriate."

This fall, Swiss banking regulator FINMA suggested a capital surcharge for conglomerates the size of UBS and far-stricter leverage ratios than ones currently being proposed in the U.S. Those moves caused UBS to push back a return on equity target (RoE) of 15% to 2016, undermining the firm's ability to market itself to investors as a low-risk, high RoE, capital generative business, according to Wheeler.

Nevertheless, it still remains a point of speculation as to whether UBS is letting pitch-books for its long-expected investment bank split-off collect dust, or not. Ratings agencies and regulators around the world, including those in Switzerland, have openly speculated about the merits of such moves.

"We've been very clear on our strategy and it includes the investment bank," a UBS spokesperson said in an email to TheStreet.

Even if UBS continues to count its investment banking unit within financial projections of the overall banking conglomerate, there is reason to think 2014 may be a good time to freshen up scenarios of a split, as Wheeler noted in his report.

Both CEO Ermotti and investment banking head Orcel have helped UBS improve its capital position in the wake of the European sovereign debt crisis, and the firm now stands on a far firmer footing than it did just 18-24 months ago.

Under Orcel, UBS has also pulled back from some capital intensive fixed income currency and commodity trading businesses.

Wheeler wrote in his report that UBS's investment banking split-off could mirror American Express's 1994 divestiture of Lehman Brothers.

"The most appropriate strategy to achieve this would be a spin-off through a dividend in specie, in parallel with the disposal of Lehman Brothers by American Express in 1994, with the Investment Bank adopting the SG Warburg brand," Wheeler wrote. The analyst estimates the value of the New UBS and SG Warburg could boost the company's share price by 14%.

Both new regulations and an improving European economy could pave the way for an investment banking unit split, Wheeler said.

The finances of cash-strapped governments across the Eurozone may be in the beginning of a recovery, a possibility that would augur positively for the banking sector and economic growth rates across the region. That environment of recovery may allow UBS to execute a spin-off in an attractive way for shareholders and in a manner that doesn't destabilize the firm.

"[It] would not have been possible to consider a year ago as the IB was performing so badly... but Orcel has done a good job and the SG Warburg we envisage, would have no legacy assets as they would be left behind in the New UBS, which has the excess capital," Wheeler said in his email to TheStreet.

In previous research reports, the analyst has been an active promoter of investment banking spin-offs across Europe.