UBS cutting investment bank seen freeing cash for investors

UBS AG’s decision to cut as many as 10,000 jobs and retreat from capital-intensive trading businesses will help position Switzerland’s largest bank to return more funds to shareholders.

UBS intends to split off and wind down much of its fixed-income operations, reducing risk-weighted assets by an additional 100 billion Swiss francs ($107 billion), said a person with knowledge of the matter who requested anonymity because the plans are private. The revamp stands to help the Zurich-based bank meet capital goals faster than it would otherwise. UBS rose to a seven-month high in Swiss trading.

Chief Executive Officer Sergio Ermotti is overhauling the bank as Swiss regulators pressure UBS and Credit Suisse Group AG to boost capital and scale back trading and investment-banking operations. Ermotti, 52, said in July that once the bank reaches its capital targets under Basel III rules, UBS plans to “implement a policy of returning capital to our shareholders in different forms.” The bank paid its first cash dividend in five years for 2011, amounting to 10 centimes a share.

“UBS is going back to its roots,” said Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co. “UBS is in fact the easiest restructuring story besides Credit Suisse by closing most of fixed income, cutting back-office costs, freeing up capital and becoming even more wealth-management geared.”

‘Material Dividends’

UBS will be able to pay “material dividends” as it shrinks the investment bank, said Abouhossein, who forecasts the bank may pay a dividend of 65 centimes a share for 2013, implying a dividend yield of 5.3 percent.

UBS rose as much as 6.7 percent and was 6.6 percent higher at 13.04 francs by 1:54 p.m. in Zurich. The stock is up 17 percent this year, exceeding the gain in the Bloomberg Europe Banks and Financial Services Index, which tracks 38 companies.

The additional cuts would leave the investment bank with less than 35 billion francs in risk-weighted assets and UBS as a whole with less than 140 billion francs, based on targets the company previously disclosed for 2016. As UBS aims for a Basel III common-equity ratio equal to 13 percent of risk-weighted assets, it will need about 18.2 billion francs in common equity once the cutting is done. At the end of June, UBS already had 26.7 billion francs in common equity.

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