UBS's 8,700 job cuts provide reality check

Goldman Sachs delivers a knock-out first quarter and flags big bonuses for staff. Days later, UBS announces 8,700 job cuts and a SFr2bn quarterly loss. Neither bank is truly representative of the banking sector, but UBS is probably the better leading indicator.

The latest losses from the Swiss investment bank and wealth manager come after selling $39.1bn of illiquid assets to Switzerland’s central bank. That disposal left UBS with $22bn of dodgy monoline, leveraged finance and auction-rate securities.

Writedowns on this sludge probably account for most of the SFr3.6bn of new credit losses, alongside a SFr300m hit from the last tranche of assets sold to the central bank. The total Tier 1 capital ratio dropped by more than one percentage point, to about 10%.

UBS may have a higher concentration of risky assets than the rest of the sector. And new chief executive Oswald Grübel might be demanding particularly conservative valuations. Still, the read-across for the industry can only be bad.

Of course, UBS has one problem that most of its peers don’t. Its wealth management franchise continues to deteriorate. Almost 3% of the division’s assets walked out the door during the quarter. The recent settlement with US tax authorities, which tore a hole in the principle of banking secrecy, is likely to drive more clients away.

Both the generic and the specific bad news play to Grübel's approach since he joined UBS in February. Management can’t do anything about markets or much about revenues, but it can cut costs. A fresh 11% cut takes the workforce to 67,500 - slap bang where UBS’s headcount ended 2004. The reduction goes with simplification and a return to a business that will more closely resemble the UBS of five years ago.

Not all banks will simply shrink to their size before the credit boom. Relative winners like Goldman will take market share, while others will wither away. But most big investment banking operations look more like UBS than Goldman.

Banking executives have been talking up the first quarter. But for now, Grübel’s downbeat outlook and defensive actions look painfully credible.