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LIKE MOST SWISS, CHRISTOPH MÜLLER NEVER PAID MUCH heed to the doings of the country’s high-flying bankers. The 40-year-old Müller regularly puts in 13-hour days running his construction supplies company in Langenthal, a small town some 25 miles northeast of the capital of Bern, and he assumed that the big banks managed themselves at least as sensibly as he and his fellow small-business owners managed their concerns. So when giant UBS ran up Sf21.3 billion ($23.8 billion) in losses on U.S. subprime securities in 2008 and needed a Sf43 billion taxpayer bailout, he was understandably livid. “In the old days, if a banker lost that much money, he would jump out a window,” says Müller.

The Swiss may not be storming Zurich’s Paradeplatz to demand the defenestration of bankers, but Müller is far from alone in his anger. The losses at UBS broke a bond of trust between Switzerland’s big banks and its citizens, an extraordinary development in a country where banking is as much a part of the national identity as watchmaking and chocolate. Suddenly, it’s no longer safe to assume that what’s good for Credit Suisse and UBS is good for Switzerland. The financial crisis demonstrated that problems at those big banks — whose combined assets are four times the size of the national economy — could overwhelm government resources just as the banking blowups in Iceland and Ireland had.

The government and Swiss regulators have responded with the most radical overhaul of banking rules in the industrial world, one that promises to change the face of Swiss banking. In October, Parliament adopted a law requiring the two big banks to boost their capital to 19 percent of risk-weighted assets, a draconian level that’s nearly twice the 10.5 percent ratio the Basel III capital accord will phase in globally between now and 2019. The Swiss have also gone further than the Basel Committee on Banking Supervision in mandating tough new liquidity requirements that will force the banks to hold greater amounts of safe, liquid assets to tide them through any crisis. The so-called Swiss finish of capital and liquidity requirements will impose higher regulatory costs on Credit Suisse and UBS than their global competitors are facing and will hit their investment banking divisions especially hard.

“It’s very difficult to see how UBS and Credit Suisse’s investment banking operations under their current business model will be able to generate returns above their cost of capital,” says Oliver Flade, Frankfurt-based financial sector analyst for Allianz Global Investors, which owns stakes in both banks.

The big Swiss banks are now struggling to retool for the new, austere era of finance. In a major change of their business models, Credit Suisse and UBS are scaling back the size and risk appetite of their investment banking operations and putting a greater emphasis on private banking and wealth management, which require less capital and, the banks hope, will generate steadier returns. “What’s most important for us is to become preeminent worldwide in wealth management,” says Sergio Ermotti, a veteran investment banker who took over as CEO of UBS last September.

The scale of cutbacks at UBS is sweeping — and not surprising given its recent record. The group’s investment bank is slashing its balance sheet through billion-dollar asset sales, shutting down proprietary trading desks, reducing its fixed-income book, abandoning business lines such as fixed-income macro directional trading and asset securitization, and firing 1,800 investment bankers. UBS expects to have nearly halved the risk-weighted assets of its investment banking division, to Sf150 billion, by the end of 2016.

Credit Suisse, which remained profitable throughout the crisis, is being more careful with the knife, but even so, the bank plans to slash the risk-weighted assets of its investment banking arm by 37 percent by the end of 2014. The bank began putting more emphasis on private banking and wealth management three years ago, and recent poor performance at the investment bank — which posted a pretax loss of Sf1.3 billion in the fourth quarter of 2011, compared with a profit of Sf558 million a year earlier — is likely to accelerate the trend. The investment bank will increasingly look to “exploit synergies with our private banking and asset management business,” chairman Urs Rohner and CEO Brady Dougan wrote last month in a letter to shareholders announcing the group’s 2011 results.

Both firms assert that their investment banking operations will be profitable under the new regime. UBS is targeting a 12 to 17 percent pretax return on equity by 2016, and Credit Suisse is predicting a 15 percent pretax return by that year. But many observers doubt that the banks can compete effectively — and earn decent returns — after such sharp retrenchment. By 2016 the capital employed at UBS’s investment bank will be 65 percent of the comparable levels at Deutsche Bank and Barclays Capital, while the figure for Credit Suisse will be just 60 percent.

“No other investment bank has deliberately reduced its scale to the extent UBS is planning,” says Christopher Wheeler, London-based banking analyst for Mediobanca. “This is unknown territory.” Credit Suisse is trimming its sails more subtly, Wheeler adds, but “it is also becoming a second-tier player in investment banking.”

To be sure, investment banks around the world are making plenty of cutbacks. An uncertain global economic outlook has caused a decline in fee-generating activities like M&A and initial public offerings of stock, while tighter regulatory constraints are squeezing other businesses, particularly the once-lucrative market for trading fixed income, currencies and commodities (FICC). Revenues from FICC and equities dropped by 24 percent among major investment banks last year, according to an estimate by Goldman Sachs Group. Goldman cut 2,400 jobs, or 6.7 percent of its payroll, last year after its return on equity plunged to just 3.7 percent. Citigroup has announced plans for 4,500 job cuts, Morgan Stanley will drop 1,600 slots, the U.K.’s Royal Bank of Scotland Group is slashing 3,500 jobs (see story, page 32), and France’s Société Générale has said that its investment bank will retrench to focus on core European clients rather than competing globally against bulge-bracket firms.

Credit Suisse and UBS will face harsher headwinds than their rivals going forward, however, because of Switzerland’s tough new regulatory requirements. As a result, both banks are looking to tailor their investment banks to provide products and services mainly for private banking clients. A key focus at both banks will be ultra-high-net-worth individuals, those wealthy clients with assets of $100 million or more. “There is no question this is the most dynamic segment of wealth management today,” says John Zafiriou, head of Solution Partners, an arm of Credit Suisse’s private bank that creates investment banking products for wealthy clients.

Last year’s financial results underscore the logic behind the shift to wealth management. At Credit Suisse, which emerged from the global financial crisis in better shape than most major banks, net income plummeted 61 percent last year, to Sf2.0 billion, while revenue fell 17 percent, to Sf25.4 billion. Private banking, which includes wealth management, generated 42.8 percent of group revenue and 85.4 percent of pretax profits, while the investment bank contributed 45.2 percent of revenue and just 2.9 percent of pretax profits, or Sf79 million. The bank’s wealth management business pulled in Sf37.8 billion in net new money from clients.

At UBS net income plunged 43.8 percent in 2011, to Sf4.23 billion, largely because of poor performance by the investment banking division. That unit posted a pretax loss of Sf1.23 billion, compared with a profit of Sf2.75 billion in 2010. By contrast, the bank’s wealth management division posted a 15.9 percent rise in pretax profits, to Sf2.7 billion, and attracted Sf23.5 billion in net new money from clients. Wealth Management Americas, which reports as a separate unit, had pretax profits of Sf504 million and gained Sf12.1 billion in net new money. UBS doesn’t break out the results of its private banking business.

The shifting strategies of the big banks seem to be welcomed by shareholders, particularly in Switzerland. “UBS and Credit Suisse are trying to become the institutions they were in the 1980s and 1990s, when they had much smaller investment banks — and that’s what they should do,” says Martin Janssen, the Zurich-based chief executive of Ecofin Research and Consulting, which offers investment advice to the leading Swiss pension funds.

Other analysts dismiss the idea of going back to some golden era of low-risk, high-return business of catering to the rich. “Banking was never riskless in Switzerland, and it never consisted purely of wealth management,” says Manuel Ammann, director of the Swiss Institute of Banking and Finance at the University of St. Gallen. He points to the so-called Chiasso affair of 1977, in which Credit Suisse lost some Sf3 billion — equivalent at the time to almost its entire capital — in a startling episode of fraud involving one of its bankers, who engaged in illegal dealings with Italian tax evaders. In the 1990s the bursting of a national housing bubble caused big mortgage losses to banks big and small. But neither of those episodes caused the kind of political uproar that the UBS troubles did, or required the government to intervene on such a dramatic scale.

UBS'S MASSIVE LOSSES BROUGHT TO A BITTER END more than a decade of efforts to break into the bulge bracket of global investment banks. Swiss Bank Corp., which would merge with Union Bank of Switzerland to create UBS in the late 1990s, acquired fabled U.K. merchant bank S.G. Warburg & Co. in 1995 to gain a foothold in the lucrative London market. Five years later UBS paid $10.8 billion to buy Paine Webber Group and expand its investment banking and wealth management businesses in the U.S.

The strategy worked for a time. At its apex in 2007, UBS ranked sixth among investment banks, with a 5.4 percent share of the global fee pool, according to data provider Dealogic. It boasted the leading franchise in European equities and reigned supreme as the largest investment bank in Asia. But UBS’s efforts to build a leading fixed-income business proved disastrous. Extravagant bets on U.S. subprime mortgages and other toxic assets went awry when the housing market turned down, forcing UBS to take more than $50 billion in credit write-downs, more than any other bank. In a rush to reduce its exposure, the bank lopped a trillion francs off its balance sheet over the next four years, reducing total assets to Sf1.42 trillion by the end of 2011. Credit Suisse has slimmed down to Sf1.05 trillion in assets from its precrisis level of Sf1.36 trillion.

At the same time that UBS was struggling to shed bad assets, the bank faced the threat of being banned from doing business in the U.S. because of its efforts to help wealthy Americans evade taxes with secret Swiss bank accounts.

UBS seemed to regain its footing when former Credit Suisse CEO Oswald Grübel was lured out of retirement to take the reins in 2009. He promised to restore a balance between wealth management and investment banking at UBS. He also moved quickly to settle the spat with the U.S. government, which ended up imposing $780 million in fines on UBS and getting the names of more than 4,500 UBS accountholders in the U.S.

But soon UBS stumbled yet again. An executive on its London-based equity desk, Kweku Adoboli, was arrested last September and charged with making unauthorized trades that had led to $2.3 billion in losses at the bank. The scandal forced Grübel to resign nine days later. He was replaced by Ermotti, a Swiss national and longtime investment banker at Merrill Lynch & Co. who had joined UBS from UniCredit in early 2011 to head up the bank’s European business.

By then the regulatory vise was tightening around the two big banks. Shaken by the near-collapse of UBS in 2008, the Swiss in 2009 created a Commission of Experts for limiting the economic risks posed by large banks. Better known as the “too big to fail” commission, it included representatives from the Finance ministry, the Swiss National Bank, the Swiss Financial Market Supervisory Authority (Finma), academia and the private sector, most notably UBS and Credit Suisse. The panel’s main goal was to ensure that Switzerland avoided the plight of Iceland and Ireland, where banking sector collapses pushed the governments to the brink of default. “I don’t think you can compare the Swiss situation to Iceland or Ireland,” says Oscar Knapp, head of the market division at the State Secretariat for International Financial Matters at the Finance ministry, who has been closely involved in crafting the bank reforms. “But our package of measures is intended to prevent the difficulties of a major bank from endangering the entire economy.”

Finma, the Swiss financial regulator, is the main government agency charged with enforcing stricter capital and liquidity standards. Housed above a dress shop on a narrow, winding street a block away from Paradeplatz, Zurich’s central square, which is dominated by the offices of UBS and Credit Suisse, Finma is notably lean and nimble compared with most European and U.S. regulators.

The agency’s banking division is led by Mark Branson, a 42-year-old Briton who previously headed UBS’s wealth management unit. In that role he was obliged to apologize at a 2009 U.S. Senate hearing for UBS breaches of U.S. law in helping Americans to evade taxes. He resigned from the bank to join Finma in January 2010. Today he presides over a modest staff of 100 at the agency, a far cry from the 38,000 employees he oversaw at UBS. Finma runs on a modest annual budget of Sf90.1 million, a figure eclipsed by the assets of many of his former clients at UBS.

Branson and his team take a pragmatic, no-nonsense approach to regulating the banks. “We don’t have thousands of pages of regulations,” he says. “And in terms of speed of implementation of reforms, once we identify a gap in the existing regulations, we do try to fix it as quickly as possible.” He notes that Finma ordered Credit Suisse and UBS to apply Basel’s stringent new capital rules for securities trading operations, a key first response to the financial crisis, one year ahead of schedule, in 2010.

The Swiss banks have been similarly ahead of the curve in applying new liquidity regulations mandating that banks hold a higher percentage of safe, liquid assets such as government bonds to ride out any financial panic. Basel III calls for international banks to meet the new liquidity standards by 2015, but Finma has been applying the standard since June 2010, requiring UBS and Credit Suisse to hold enough high-quality liquid assets to cover an estimated 30 days’ worth of funds outflows in a crisis scenario.

Executives at UBS and Credit Suisse grumble about having higher regulatory costs than their rivals, but they do enjoy some benefits as a result. “CDS spreads for the Swiss banks are well below most of their peer group,” says Andreas Venditti, Zurich-based banking analyst for Zürcher Kantonalbank. “The market sees them as less risky. And they have the Swiss regulators to thank.” Late last month credit default swaps on UBS debt were trading at 166 basis points, meaning that it cost $166,000 to insure $10 million worth of UBS debt for five years, according to financial information company Markit Group. Credit Suisse’s CDSs were quoted at 146 basis points. Among European banks, only Deutsche Bank (160 basis points) and Barclays (175) had similarly low CDS rates. Société Générale was at 271 basis points, Banco Santander at 281 and UniCredit at 341.

The Swiss banks also enjoy low funding costs thanks to their strong capitalization, extensive domestic retail operations — the two banks control more than 50 percent of Swiss retail bank deposits — and large deposit base from global wealth management clients. In January, UBS issued €1.5 billion ($2.0 billion) of four-year, 3.125 percent bonds priced to yield 175 basis points more than comparable Swiss government paper. By comparison, Deutsche Bank paid a spread of 180 basis points over U.S. Treasuries to sell $800 million worth of four-year bonds last month.

Besides the “too big to fail” threat, the other great systemic issue facing Swiss banks has been the controversial one of tax evasion. The UBS settlement with U.S. tax authorities in 2009 turned out to be only the opening salvo in a battle that has spread to Europe.

Last year the Internal Revenue Service accused 11 more Swiss banks, including Credit Suisse, of helping U.S. citizens to avoid taxes through secret accounts. Credit Suisse has informed some of its U.S. clients that it will turn their names over to the IRS. The bank has set aside Sf295 million in reserves to help cover a potential settlement with Washington. Meanwhile, Wegelin & Co., a 270-year-old firm that is Switzerland’s oldest private bank, was indicted on February 2 in New York on federal charges of having hidden more than $1.2 billion for U.S. clients fleeing UBS. Anticipating the indictment, Wegelin announced on January 27 that it had agreed to sell most of its business, with Sf21 billion of client assets, to Raiffeisen Schweiz Genossenschaft, the Swiss cooperative bank, for an undisclosed sum. Although neither Washington nor Bern has disclosed the full list of banks in the IRS crosshairs, they also include Julius Baer Group and Zürcher Kantonalbank.

The Swiss government has appointed Knapp, who served as a diplomat before joining the Finance ministry, to negotiate a settlement between the banks and the U.S. tax authorities. “For decades we did not have a strategy to deal with untaxed money from abroad, and some abuses certainly happened,” says Knapp. “And now it is difficult to convince people that our policies have really changed, that we don’t want any undeclared money coming into the country.”

Dealing with undeclared money already in Switzerland continues to test the government’s credibility. According to Boston Consulting Group, Swiss banks hold more than $2 trillion in offshore accounts. The amounts that are the subject of hard-fought negotiation between Switzerland and foreign governments are a small fraction of this total. The Swiss banks have given the U.S. Justice Department encrypted data about bank executives and the U.S. clients they serviced, but they have refused to supply the decryption codes until an agreement is reached that would waive criminal prosecution of the banks.

Bern has taken a different tack in Europe. Last year Switzerland reached agreements with Germany and the U.K. under which income from undeclared Swiss accounts held by citizens of those countries will be taxed at mutually agreed-upon rates. These foreign clients will pay penalties for failing to pay taxes on previous earnings from their Swiss bank accounts. The accounts will then be considered legal by German and U.K. tax authorities, and the clients will remain anonymous.

One hurdle still to be overcome is an objection by European Union tax commissioner Algirdas Šemeta that these deals are too generous to tax evaders. But Switzerland is staying on the sidelines in this particular skirmish. “It’s a question between those countries and Brussels,” says Knapp.

THE MOUNTING FINANCIAL PROBLEMS of the banks have triggered outrage among ordinary Swiss voters, a factor that has fueled the nation’s tough regulatory clampdown. Animosity toward bankers has become a worldwide phenomenon, but it is remarkable in Switzerland, a country synonymous with banking. “It’s part of our very identity,” says Suzanne Schär, a political scientist at the University of Bern. An unlikely parliamentary coalition of the left-leaning Social Democrats and Greens and the right-wing, nationalist Swiss People’s Party last year sought to force Credit Suisse and UBS to split their investment banking units off from their private and commercial banking operations, and failed by a narrow margin.

The grassroots clamor has forced centrist politicians to adopt a tougher stance toward the banks. Rüdi Noser, a member of the lower house of Parliament for the center-right Free Democrats and an expert on banking issues, recalls wistfully that until a few years ago financial matters rarely roiled the constituents of his small district in the foothills of the Alps, a 30-­minute drive east of Zurich. “Few voters knew what a triple-A rating was,” he says. “Now everybody does. The crisis has enlarged people’s vocabulary and brought all sorts of financial issues into the political arena.”

Public opinion was inflamed anew by the recent controversy involving former Swiss National Bank chairman Philipp Hilde­brand. Hildebrand had championed the Swiss finish of stringent bank capital rules and had played a key role in designing tighter global regulations as vice chairman of the Basel-based Financial Stability Board. Hildebrand also fought to resist upward pressure on the Swiss franc in a bid to keep the country’s exporters from getting priced out of global markets. But disclosures that his wife, Kashya, had bought $504,000 in a foreign exchange transaction last August — just days before her husband changed SNB policy and set a new ceiling of 1.20 francs to the euro — provoked an outcry. Kashya, a former currency trader who had met Hildebrand when the two were working at hedge fund firm Moore Capital Management in New York in the 1990s, said she regarded the franc as overvalued and acted on her own, but she made a cool 15 percent profit by converting her funds back to francs after Hildebrand’s policy move caused the currency to drop. Although he denied any wrongdoing, Hildebrand bowed to public pressure and resigned in early January. “Credibility is a central banker’s most valuable asset,” he said, explaining his reason for stepping down. “I would like to think I have been a damn good central banker.”

“He was supposed to be a good guy — he pushed all those banking reforms,” says Müller, the Langenthal small-business owner. “But he turned out to be a typical banker, getting involved in private deals.”

The Hildebrand controversy temporarily drew attention away from scandal-prone UBS, but the bank has been working to right itself. It is pursuing a strategic policy shift that will dramatically reduce the capital deployed in its investment bank.

The downsizing threatens to undermine an already weakened franchise. UBS has dropped three places from its precrisis rank, to ninth in the global league table last year, with $2.34 billion in investment banking revenues, or 3.3 percent of the market, according to Dealogic. That was less than half the size of market leader JPMorgan Chase & Co., which had $5.66 billion in revenues and an 8.1 percent share. In recent years Credit Suisse and Deutsche Bank have leapfrogged UBS, rising to fifth and sixth place, respectively, last year, with virtually identical market shares of 5.1 percent, while Barclays Capital edged ahead of UBS to reach the No. 8 position, with a 3.9 percent market share.

In global debt capital markets last year, UBS ranked sixth, acting as book runner on $253.5 billion worth of deals, according to Dealogic. That was well ahead of tenth-ranked Credit Suisse’s $228.1 billion but far behind market leader JPMorgan Chase’s $387.8 billion. UBS ranked eighth in equity capital markets, handling deals worth $577 million, well below fifth-placed Credit Suisse’s $862 million and top-ranked Morgan Stanley’s $1.13 billion.

In the booming Asia-Pacific market, where it had been the top-earning investment bank for eight consecutive years, UBS lost its perch. The bank fell to second place last year, with $501 million in revenue, just behind new market leader Credit Suisse’s $505 million but ahead of Goldman Sachs ($486 million) and Deutsche Bank ($372 million).

Over the past two years, UBS has lost several of its leading Asian bankers. Henry Cai, the bank’s head of China investment banking, moved over to Deutsche Bank in 2010 to lead its corporate and investment bank in China, while Matthew Koder, UBS’s head of global capital markets, was poached last year by Bank of America Merrill Lynch to oversee global corporate investment banking for Asia-Pacific.

If UBS meets its 2016 target, the capital it deploys in its investment bank will be 70 percent lower than that of JPMorgan Chase.

Investment banking will take the brunt of the 3,500 job cuts announced by UBS last July. Employment at the investment bank will drop from 17,900 at the end of September to 16,100 by the end of 2012. For UBS as a whole, the total payroll will drop from 65,921 at the end of September to 62,420 by the end of 2012.

At Credit Suisse investment banking will also take the vast majority of the 3,500 job cuts that began in the second half of last year. This will leave the investment bank with 18,300 employees at the end of 2012, down from 21,500 last September.

Shareholders applaud the cutbacks at UBS but caution that only continued vigilance will keep the bank on its new path. “You now have that kind of pressure after the rogue trading scandal and Grübel’s resignation,” says Allianz’s Flade.

The biggest reductions at UBS will come from the fixed-income, currencies and commodities unit, long considered the heart of any investment bank. “You cannot run a global bank without something as basic as fixed-income trading,” Grübel told Institutional Investor just a year ago, when he was still CEO. In a sign of that importance, the bank currently devotes Sf85 billion of capital to FICC macro directional trading. Nonetheless, over the next two years it will slash that capital by 53 percent, and it plans to exit the business entirely by the end of 2016. The bank also plans to reduce the Sf20 billion of capital backing FICC emerging-markets activity by 25 percent. In equities the bank is cutting its Sf27 billion of capital by 11 percent, largely by eliminating proprietary trading.

By comparison, during the same period Credit Suisse is targeting a 61 percent reduction in its Sf66 billion of capital allocated to FICC macro and an 8 percent drop in its Sf21 billion of capital for FICC emerging markets, but it plans no reduction of the Sf31 billion of capital allocated to its equity platform.

In announcing its cutbacks, UBS disclosed that 31 of the 80 business lines in its investment bank showed negative returns in the first three quarters of last year. Yet the bank is closing only four of those businesses: FICC macro, FICC asset securitization, FICC complex structured products and equity proprietary trading. Six other lines — four of them involving FICC and two in equities — will be reduced.

Carsten Kengeter, head of UBS’s investment bank, says the bank is retaining most of its activities, albeit on a reduced scale, to meet the needs of its ultra-high-net-worth private banking customers. “If we exited all losing business lines, our ultra-high-net-worth clients would find our products and services less attractive and end up moving over to competitors,” he explains.

Kengeter cites prime brokerage as an example of a time-consuming, expensive business line that is being retained because institutional investors, hedge funds and family offices demand it. Equity capital markets is another loss maker that UBS is keeping, because it allows U.S. wealth management clients to participate in IPOs. Though IPOs were scarce in 2011, the bank hopes they will increase this year, allowing the business line to regain profitability. Last, UBS is retaining business lines like over-the-counter derivatives, which are currently unprofitable because of impending Basel III capital requirements but might be repriced upward over time. “We don’t want to get out of the business and then have to scramble back into it five years from now,” says Kengeter.

While applauding the scope of the investment banking cutbacks, analysts and investors remain cautious about the execution risks. Mediobanca’s Wheeler says UBS has failed to explain clearly to clients how the new strategy will affect them; he adds that the bank must shore up morale in the investment banking departments that it intends to retain and strengthen, and find buyers for the huge volume of risk-weighted assets that almost all global banks are peddling. “Those risks would be on my list of main concerns as well,” concedes Kengeter. “The bottom line is how well we can deliver.”

The extensive surgery on the investment bank is intended to improve the performance of wealth management, now clearly the main focus of UBS. “This is the only business for which we have global aspirations of leadership,” says Jürg Zeltner, head of UBS Wealth Management. It is a vision that comforts Swiss investors who believe the two big banks share a competitive advantage over global rivals. “UBS and Credit Suisse are still the very best wealth managers in the world,” says pension fund adviser Janssen. “With passive investments they do a marvelous job, offering competitive prices and high quality.”

But to keep a step ahead of global rivals, they will have to demonstrate their alpha competence, especially for wealthy Asian clients. After net withdrawals of more than Sf200 billion in 2008–’10, UBS wealth management attracted more than Sf20 billion in net new money last year, mostly from Asia, but with Sf273 billion in invested assets, Europe remains far ahead of the Sf154 billion that originate in Asia. At Credit Suisse, Sf77.6 billion of invested assets originate in Asia, compared with Sf252.7 billion in Europe, the Middle East and Africa.

Asian private banking clients demand investment bank products for foreign exchange and equity transactions, as well as hedging capabilities and bridge finance for IPOs. Their family offices hire bankers who want access to UBS wealth management research and execution platforms. “If we cannot deliver this direct access, they will go to another bank,” says Zeltner.

With the Asian wealth management business rising so fast, some analysts suggest that UBS consider selling its sizable U.S. wealth management operation and using the proceeds to expand in the Far East. But under Robert McCann, UBS Wealth Management Americas recorded Sf501 million in profits before taxes in 2011, compared with a Sf130 million loss the year before. According to CEO Ermotti, the division is well on its way to achieving an annual target of $1 billion in pretax profits by 2016. And UBS’s $895,000 in revenue production per U.S. wealth management adviser is the highest on Wall Street. The progress achieved in the U.S. since the 2009 tax evasion scandal and the financial crisis, says Ermotti, has muted any arguments of shifting UBS resources there to Asia. Besides, if UBS is intent upon global leadership in wealth management, he says, “how can we not be present in the U.S., the world’s biggest market?”

It remains to be seen whether the renewed focus on wealth management will soften the hostility of domestic critics toward the big banks. “Hopefully, the public will understand that banks aren’t all evil and that they are trying to manage themselves in good conscience and to the benefit of their shareholders, customers and communities,” says UBS’s Kengeter.

Müller, the Langenthal business owner, thinks only smaller cantonal and cooperative banks deserve such trust nowadays. “I can choose from four or five of them for my business and personal loans,” he says. But he has gotten at least one bit of pleasing news from the big banks. Though there was no window-jumping, UBS and Credit Suisse announced in February that they would reduce overall bonuses for 2011 by 40 percent and 41 percent, respectively. UBS further disclosed that it had slashed its investment bank bonus pool by 60 percent from the year before and would take back one half of any share-based bonus above $2 million. Kengeter himself will forgo any bonus.  •  •

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