Oswald Grübel’s Mission To Revive UBS

Oswald Grübel has put UBS back in the black, but can he restore its former prominence?


On Paradeplatz, the central Zurich square dominated by the offices of Switzerland’s two largest banks, executives of Credit Suisse and UBS can gaze into each others’ offices and wonder how their institutions measure up. Oswald Grübel doesn’t have to wonder. He has run both banks. In the past decade, Grübel led a turnaround that revived profits and morale at Credit Suisse before retiring as the bank’s chief executive officer in 2007. Two years later the board of UBS, hoping for a similar result, asked Grübel to take the helm of its deeply troubled bank, which ran up massive losses during the financial crisis and needed a Swiss government bailout to survive.

“All the time I was at Credit Suisse, I heard how much better a bank UBS was,” Grübel, 67, tells Institutional Investor in a recent interview in a conference room at UBS headquarters overlooking the luxury stores and private banks of snow-swept Bahnhofstrasse, the city’s main avenue. “Now the same people are telling me that Credit Suisse is so much better than UBS. They were wrong then, and they will be proved wrong again.”

Grübel will need to summon all his determination and experience to prove the skeptics wrong, given the extent of UBS’s decline. The bank was the world’s largest wealth manager and a bulge-bracket global investment bank a mere four years ago, but it nearly foundered because of its own missteps during the financial crisis. UBS gambled recklessly on subprime mortgages and other toxic investments, and ended up taking more than $50 billion in securities write-downs — a greater amount than any other bank. The fallout badly damaged the bank’s vaunted wealth management franchise, causing clients to withdraw more than $200 billion in funds.

The losses prompted the forced departures of two chairmen and two CEOs in the space of 18 months and spurred dozens of other senior executives to defect to sounder rivals. The Swiss National Bank had to step in to stop the hemorrhage, taking tens of billions of dollars of bad assets off UBS’s books and injecting Sf6 billion ($5.7 billion) of capital into the bank. As if those problems weren’t enough, UBS was caught helping wealthy American clients hide billions of dollars from U.S. tax authorities and had to pay $780 million to settle the charges and maintain its U.S. banking license.

Since taking over as CEO in February 2009, Grübel, a tall, sturdy German with a baritone growl who’s known to almost everyone simply as “Ossie,” has been working methodically to restore the bank to health. He pressed forward with an initiative launched by his predecessor Marcel Rohner to chop $1 trillion off the bank’s $2.5 trillion precrisis balance sheet. UBS had slashed assets by Sf943 billion by the end of September 2010, including the transfer of almost $40 billion of illiquid mortgage-backed securities to a fund established by the Swiss National Bank and the deeply discounted sale of $22 billion in U.S. residential-mortgage-backed securities to fund manager BlackRock. Grübel also moved aggressively to reduce annual expenses by Sf3.5 billion by cutting nearly 20,000 jobs, or almost one quarter of the bank’s payroll.


Even as he moved to stanch the bleeding, Grübel recruited a cadre of senior bankers to help lead a turnaround at UBS. He installed two former Credit Suisse colleagues in senior posts: Ulrich Körner, a former CFO and COO at Credit Suisse, is driving the cost-cutting campaign as chief operating officer, while Lukas Gähwiler, who ran the credit business of Credit Suisse’s private bank, heads up UBS’s domestic banking business. Grübel also recently promoted Carsten Kengeter, a former Goldman Sachs Group trader who joined UBS’s key fixed-income, currencies and commodities unit in late 2008, to head the investment banking division, in a bid to revive its fortunes. “We tell potential hires that UBS is a fair and exciting place to work — a real global turnaround story,” Kengeter says. Grübel has set his team the ambitious goal of achieving pretax profits of Sf15 billion by 2014.

Tying all the initiatives together is Grübel’s so-called one-bank strategy. He wants UBS’s investment banking, wealth management and asset management arms to work together more closely to generate business and wring greater fees, and profits, from customers. To that end, the bank is providing wealth management clients with greater access to the investment bank’s expanded offering of equity and bond research. Similarly, wealth management clients with their own companies can turn to the investment bank to arrange financing for their businesses. “Deals across departments will be rewarded,” promises Grübel, who pursued a similar strategy at Credit Suisse and handed out bonuses known as “Ossie dollars” to reward investment bankers and wealth managers for working in tandem to service clients.

Matthew Clark, a London-based analyst for Keefe, Bruyette & Woods, says Grübel’s one-bank strategy pulled Credit Suisse out of its own doldrums in the past decade. “The same playbook is being used,” Clark says.

So far, Grübel’s measures are bearing fruit. UBS returned to the black in 2010 after three years in which it recorded a total of Sf29.2 billion in net losses. UBS posted net income of Sf5.9 billion in the first three quarters of 2010, compared with a loss of Sf2.7 billion in the same period a year earlier. At the pretax level, which Grübel is targeting, the bank showed a profit of Sf6.2 billion in the first three quarters, compared with a loss of Sf2.6 billion a year earlier.

“UBS is definitely out of the woods, though clearly there is work to be done,” says Citigroup banking analyst Kinner Lakhani.

Indeed, there is. Notwithstanding the progress Grübel’s team has made, UBS has a long way to go to regain its former luster. The wealth management division, under the leadership of UBS veteran Jürg Zeltner, has managed to stop the bleeding of client funds but is lagging rivals in pulling in fresh money. The investment bank, which was a leader among European players and hot on the heels of Wall Street’s giants before the crisis, has slipped noticeably. Last year, UBS ranked eighth among global banks in investment banking revenues, with $2.8 billion, or 4.0 percent of the market, down from sixth place with a 5.4 percent market share in 2007, according to Dealogic. Over that period, Deutsche Bank and Credit Suisse leapfrogged UBS, rising to fifth and sixth place, respectively, last year, with market shares of 5.3 percent and 5.2 percent, while Barclays Capital trailed just behind UBS with a 3.9 percent share.

Especially worrisome to Grübel, a former bond trader, the investment bank’s fixed-income trading operation has fallen far behind those of its big rivals. “Our investment bank was blown apart by the crisis,” says Grübel. “We were left with hardly any fixed-income activity. And you cannot run a global bank without something as basic as fixed-income trading.” Kengeter has been hiring bond traders and salespeople aggressively over the past year to close the gap, but those moves have yet to pay off.

Considering those hurdles, many analysts are skeptical that UBS can hit the Sf15 billion profit target, which Grübel considers necessary to ensure sustained profitability and to regain the confidence of shareholders. “This is a very tough market, yet Grübel is promising more than anybody else,” says Martin Janssen, Zurich-based CEO of Ecofin Research and Consulting, a firm that offers investment advice to Swiss pension funds, all of which have stakes in UBS.

Not only is UBS trying to play catch-up, it must do so with a handicap: The bank, along with Credit Suisse, faces much higher capital requirements than its global rivals. The Swiss government, aware that the big banks’ liabilities vastly exceed the size of the domestic economy, doesn’t want a future crisis to leave the country looking like Ireland. It is insisting that the two banks boost capital to as much as 19 percent of risk-weighted assets, well above the new Basel III standard of 7 percent. Closer regulatory scrutiny also will impede efforts to rebuild the business, especially in the investment bank. UBS is under pressure from shareholders and regulators to keep a lid on compensation while revenues are still low and dividends nonexistent. Former executives, including ex-chairman Marcel Ospel and CEO Peter Wuffli, gave back some Sf70 million in bonuses in 2009 to appease shareholder anger.

Such regulatory rigor will impose a heavy burden on UBS. Still, Grübel is confident of achieving his goals and restoring UBS to its former prominence. “We still have quite a lot to do to catch up with our competitors, but we should be able to do this,” he says.

The idea that UBS would struggle to compete is a humbling one, considering the bank’s heritage. UBS was born big and rich, the offspring of the 1998 merger of Union Bank of Switzerland, then the country’s second-largest lender by assets, with Swiss Bank Corp., the third largest. Union Bank was renowned for its Swiss retail and commercial banking operations but had a reputation for conservatism and faced pressure from activist shareholder Martin Ebner to boost returns. SBC’s strong suit was investment banking, thanks to its purchases of London merchant bank S.G. Warburg & Co. in 1995 and Wall Street investment bank Dillon Read & Co. in 1997. After spurning an opportunistic takeover approach from Credit Suisse, Union Bank’s board agreed to acquire SBC for $19.7 billion in stock in 1998. The merger knocked Credit Suisse off its top perch and created what was then the world’s No. 2 bank by assets, behind Bank of Tokyo–Mitsubishi.

The new UBS faced an early trial when the collapse of Long-Term Capital Management forced the bank to take Sf950 million in losses for its exposure to the hedge fund. Mathis Cabiallavetta, who had overseen the buildup of that exposure as CEO of Union Bank, resigned as chairman, leaving UBS firmly in the hands of chief executive Ospel and his former SBC colleagues.

Determined to make UBS a global investment banking powerhouse, Ospel agreed to buy U.S. brokerage PaineWebber Group for $11.5 billion in 2000. The following year he appointed John Costas, former head of fixed-income trading at Union Bank, as CEO of the investment bank. Costas, an American, expanded his division with the aim of overtaking Goldman Sachs as the top earner of investment banking fees within six or seven years. That audacious goal didn’t seem impossible. By 2003, UBS had risen to fourth place, lagging only $410 million behind Goldman Sachs’ $2.5 billion in global fees.

Costas also expanded a proprietary trading desk in the fixed-income group that generated an increasing share of profits. Before long, the investment bank eclipsed wealth management within UBS, accounting for more than 60 percent of the group’s earnings by 2005, compared with less than 15 percent in 1998. “We cobbled together what was the first real threat in those years to enter the bulge bracket on Wall Street,” says Costas. The expansion also swelled the investment bank’s balance sheet fourfold over the same period, to $1.5 trillion, building up risks that would become apparent when the subprime mortgage crisis erupted.

In 2005, at a time when many investment banks were losing top traders to hedge funds, Costas persuaded the bank to back him in creating an in-house hedge fund, named Dillon Read Capital Management. Staked with $3 billion of the bank’s own capital and staffed initially with 100 people drawn from the investment bank’s trading desk, DRCM intended to manage the bank’s own money as well as funds from outside institutions. The unusual arrangement, as well as Costas’ lack of hedge fund experience, raised some eyebrows. “If John Costas was so good, he should have taken his people and tried to risk capital outside UBS,” says Davide Serra, founding partner and fund manager at Algebris Investments, a financial-sector-focused hedge fund.

DRCM performed well early on, generating $700 million in pretax earnings in 2005 and $740 million in 2006. But in early 2007 the fund’s big bets on subprime mortgage securities began to sour as the housing market stumbled; it racked up $138 million in losses between mid-March and mid-April of that year. UBS executives concluded that the losses would only deepen, and in early May they pulled the plug on DRCM. (Costas departed shortly thereafter. In August 2009 he co-founded a New York–based investment banking boutique, PrinceRidge Group, with William Hutchins, his former CIO at DRCM.)

After shutting down DRCM, UBS integrated its trading book back into the investment bank, but the move only worsened UBS’s problems as the global financial crisis erupted. According to an internal report to shareholders that UBS published last October, several units of the investment bank, led by Costas’ successor Huw Jenkins, had been investing heavily in U.S. mortgage securities in a bid to rebuild fixed-income trading profits after the carve-out of DRCM. There was little coordination among any of the investment bank units or between those units and the DRCM hedge fund, and no overall assessment of risk positions. The uncontrolled buying spree of fixed-income securities raised UBS’s balance sheet from $1.5 trillion in November 2005 to $2.5 trillion in August 2007.

The consequences quickly became apparent. In July the bank announced the abrupt departure of Wuffli as CEO, to be replaced by Rohner, who had been head of wealth management. On October 1, UBS pushed out Jenkins as chief of the investment bank and announced it would take its first quarterly loss in nine years because of multibillion-dollar write-downs on subprime securities — the first of many such write-downs. In a desperate bid to recapitalize, the bank placed Sf13 billion in new equity with the Government of Singapore Investment Corp. and an unnamed Middle Eastern investor.

In April 2008, Ospel stepped down as chairman and was replaced by the bank’s general counsel, Peter Kurer. At that time, UBS also began a public capital increase that raised an additional Sf15 billion. When the global crisis worsened following the September 2008 collapse of Lehman Brothers Holdings, the Swiss National Bank agreed to create a special-purpose vehicle, the StabFund, that took $39.8 billion of illiquid securities off UBS’s books, and the Swiss government injected Sf6 billion of capital into the bank by buying mandatory convertible bonds. (A year later the Swiss government sold these bonds for a Sf1.2 billion profit, and by the end of June 2010, the central bank had earned Sf1.3 billion on the StabFund, while its exposure had fallen to $19.2 billion).

The turmoil in the investment bank was compounded by a U.S. tax evasion scandal at UBS’s wealth management arm. In July 2008 the U.S. Senate accused UBS of helping rich Americans evade billions of dollars in taxes. In February 2009, UBS agreed to pay a $780 million fine to the U.S. government to settle tax fraud charges, and in August of that year, the bank consented to turn over 4,450 names of suspected U.S. tax evaders — shaking Switzerland’s tradition of banking secrecy.

Although many Swiss bankers and politicians decried the breach of banking secrecy, the decision won strong support from Grübel, who was drafted to replace Rohner as CEO in February 2009. In the preceding weeks, Grübel had turned down overtures before Kurer convinced him he was the only banker with the stature and credibility to rally shareholders and save the bank. After two years of retirement, Ossie Grübel was bored with golf, and with being a spectator as the crisis swamped UBS. “I knew all about UBS’s problems from the outside,” he says. “I even wrote a magazine column saying the problems were worse than they thought.”

Grübel, a World War II orphan, was raised by his grandparents in the central German state of Thuringia. Rather than attending university, in 1961, at the age of 18, he took an apprenticeship in banking and securities trading at Deutsche Bank, where over the next nine years he rose to bond trader. In 1970 he joined White Weld Securities (later Credit Suisse White Weld) as a Eurobond trader in Zurich and London for eight years, and served as CEO there until 1985. Hans-Jörg Rudloff, who at the time led Credit Suisse First Boston’s powerful capital markets business, describes Grübel as down-to-earth and disciplined. “He may miss some moneymaking opportunities, but he will never be responsible for bad surprises,” says Rudloff, now chairman of Barclays Capital. “And he does not tolerate sloppy or frivolous behavior in any aspect of banking.”

Grübel moved to Credit Suisse First Boston in 1985 and held top trading posts in Asia and Europe before rising to head of global trading with a seat on the group executive board in 1997, then moving to head up private banking in 1998. He took early retirement in 2001 after clashing with CEO Lukas Mühlemann, notably over the latter’s high-priced acquisitions of Winterthur Insurance in the late 1990s. But with losses mounting at Winterthur, Mühlemann brought Grübel back several months later to run the bank’s financial services division.

When Mühlemann resigned at the end of 2002, Grübel was named co-CEO with John Mack, who had headed CSFB. In 2004, Grübel became sole chief executive after Mack was ousted in a dispute with the Credit Suisse board over his plans to expand the investment bank. Grübel implemented his one-bank strategy, jettisoning the CSFB brand and integrating Credit Suisse’s corporate and investment banking, private banking and asset management divisions. When Grübel retired a second time, in 2007, Credit Suisse had regained momentum and profitability, though it still lagged behind UBS.

The two banks’ positions quickly reversed as Credit Suisse adeptly navigated the financial crisis while UBS imploded. “The situation was worse than I expected,” Grübel says of his early days at UBS. Executives were in such shock and disarray that “they did nothing — they just visited clients,” he says. Ulrich Körner, who came on board in April 2009 as chief operating officer, says he called urgent meetings with managers to find cost savings of Sf1.7 billion in the corporate center by 2010, but weeks passed and nothing happened. “When I asked why, they said they had to hold further discussions,” says Körner, who eventually managed to implement the cuts.

Körner also delivered on an April 2009 promise to slice costs throughout the group by Sf3.5 billion by the end of 2010. The biggest cuts came at the expense of the workforce, whose numbers had fallen to 64,583 by September 2010 from a high of 83,560 three years earlier. During that period the investment bank’s head count fell to 15,666 from 23,739.

Now that UBS is no longer in danger of capsizing, Grübel must demonstrate that he can get the ship back up to speed. The bank has posted four straight quarters of profits since the fourth quarter of 2009. Its Sf5.9 billion of earnings, on Sf24.9 billion in revenues, in the first three quarters of 2010 outstripped Credit Suisse’s Sf4.3 billion in earnings and Sf23.7 billion in revenues and Deutsche Bank’s €4.1 billion and €23.5 billion.

The investment bank accounted for two thirds of group revenues but less than half of pretax profits in the first nine months of 2010. By 2014, UBS is targeting investment bank revenues of Sf20 billion, or 45 percent of group revenues, and pretax profits of Sf6 billion, or 40 percent of the group total. Many analysts doubt that Grübel and his team can meet those targets. “UBS has stabilized its investment bank but has to accept that it will not get back to where it was,” says Christopher Wheeler, London-based banking analyst for Mediobanca.

The investment bank has been recruiting aggressively to regain lost ground, hiring more than 900 staff in 2010. The top priority has been fixed income, currencies and commodities (FICC), the unit that ran up the bulk of UBS’s massive losses. In 2009, Grübel and Kengeter poached from two key rivals to start the FICC rebuild, hiring Rajeev Misra, former global head of credit trading, securitization and commodities at Deutsche Bank, and Dimitrios Psyllidis, former managing partner of global markets and investment banking at Merrill Lynch International.

The two men became co-heads of FICC in January 2010 when Grübel promoted Kengeter to CEO of the investment bank. Last year, Misra and Psyllidis expanded their FICC staff by nearly one quarter, hiring 420 people. The two men have also overseen a sharp improvement in operations, with FICC revenues rebounding to Sf4.7 billion in the first nine months of 2010, compared with a Sf1.0 billion loss a year earlier. Kengeter aims to build FICC revenues to Sf8 billion by 2014.

In equities the bank last year hired 320 people, or 11 percent of the unit’s enlarged head count. The key recruit was Yassine Bouhara, former head of global cash equities at Deutsche, whom Grübel and Kengeter lured in September to become co-head of equities alongside UBS veteran François Gouws.

The two will have a tough task trying to restore UBS’s precrisis equities franchise, which dominated the investment bank’s revenues before 2008. “Equity trading revenues are currently running at half the level they were before the crisis and well below what they were expected to perform postcrisis,” says Mediobanca’s Wheeler. In the first nine months of 2010, equities generated Sf3.5 billion in revenues, down from Sf4.0 billion for the same period the year before. By 2014, UBS is targeting Sf7 billion in equities revenues.

In corporate finance, UBS last year hired 168 bankers, or 8 percent of the division’s enlarged staff. Revenues, including M&A advisory, totaled Sf422 million in the first three quarters of 2010, down from Sf698 million in the same period the year before. The figure is well short of the Sf4 billion that UBS is targeting by 2014.

Pressure is building to demonstrate that the hiring binge will deliver the targeted revenues. “We need to arrive at a much better compensation-income ratio,” says Kengeter. That ratio was a bloated 80 percent for the first nine months of 2010, far above Goldman Sachs’ 39.3 percent last year but not much worse than the 77 percent recorded by Credit Suisse, which also expanded its payroll.

“Whenever you hire a lot of people in a short period of time, some mistakes will be made and have to be corrected,” says Kengeter. New hiring, he adds, will focus on more salespeople for FICC and equities. This puts a special onus on two key executives: Neal Shear, global head of securities businesses, and Roberto Hoornweg, global head of securities distribution. Both joined UBS in January 2010 from Morgan Stanley, where Shear was co-head of sales and trading for equities and fixed income and Hoornweg was head of global interest rates, credit and currencies.

The investment bank has claimed some wins in its corporate advisory efforts, especially in the second half of 2010. Two of its biggest deals involved emerging-markets companies. “It’s a trend in which we hope to become increasingly involved,” says Alexander Wilmot-Sitwell, who headed corporate advisory and finance as co-CEO of the investment bank before being appointed co-chairman and co-CEO of UBS Group Asia-Pacific in November.

UBS advised Kuwaiti telecommunications operator Zain Group on a $12 billion deal announced in September by Etisalat, the United Arab Emirates phone company, which agreed to purchase 46 percent of Zain. And in October, UBS was lead adviser to VimpelCom, Russia’s second-largest mobile operator, on its $6.6 billion acquisition of Weather Investments, an Egyptian company that owns Italian mobile operator Wind Telecomunicazioni and has a controlling share in Middle Eastern telephone company Orascom Telecom Holding. UBS provided some of the financing in both deals.

Notwithstanding those signs of recovery, UBS has a long road ahead as it seeks to regain its precrisis status and profitabilty. Last year it ranked eighth in overall investment banking revenues, with $2.76 billion, half of market leader JPMorgan Chase & Co.’s $5.34 billion, according to Dealogic. In debt capital markets, UBS ranked fifth, acting as book runner on $301.4 billion worth of deals, according to Dealogic. That was slightly ahead of sixth-ranked Credit Suisse’s $299.7 billion but far behind market leader Barclays Capital’s $461.2 billion. UBS also ranked fifth in equity capital markets, handling deals worth $51.2 billion, two notches above Credit Suisse’s $45.7 billion but well below top-ranked Morgan Stanley’s $78.2 billion.

Only in the booming Asia-Pacific market has UBS been able to retain its standing. In 2010, for the eighth consecutive year, it was the top-earning investment bank in the region, with an estimated $547 million in revenues, ahead of JPMorgan ($532 million) and Credit Suisse ($515 million), according to Dealogic. But executives acknowledge that the bank’s lead is eroding as competition stiffens. “Everybody is pursuing the same strategy, and margins are compressing,” says Wilmot-Sitwell.

A costly bidding war is under way for experienced bankers and financial advisers. Some key UBS personnel losses to rivals last year included Steven Barg, head of global capital markets for Asia, who joined Goldman Sachs as its co-head of equity capital markets for Asia ex-Japan; Mark Williams, head of equity capital markets for Asia, who moved to the same post at Nomura Holdings; and Henry Cai, chairman of Asia investment banking and head of China investment banking, who became Deutsche Bank’s chairman of corporate finance for Asia and head of Deutsche’s corporate and investment bank in China. To replace these losses, UBS turned to its own roster of experienced Asian hands, some of whom had moved to Europe but were brought back to the region. They include Peter Burnett, who was named chairman of global capital markets for Asia, and Sam Kendall, appointed head of equity syndicate for Asia.

UBS views Asia as its fastest-growing market and has set a 2014 revenue target for the region of Sf8.5 billion, or 25 percent of total group revenues, up from 17 percent currently. According to consulting firm Booz & Co., by the end of this year, one third of the world’s high-net-worth individuals will live in Asia, 2 percent more than reside in the U.S. and 6 percent more than in Europe. Crucially for UBS, the bank’s wealth management division recorded net client inflows in Asia throughout the recent crisis.

Asian clients are critical to Grübel’s one-bank strategy. “In this region probably more than anywhere else in the world, we see great overlaps between private ownership and corporate activity and between the private wealth business and the investment bank,” says Wilmot-Sitwell. In Japan, for example, wealth management clients have access to capital-protected structured products based on a currency strategy index devised by the investment bank that hedges ten major currencies worldwide.

The integration of the investment banking and wealth management research departments also puts a greater accent on Asia. The combined research staff of about 900 is down from almost 1,200 before the crisis, “but we have increased our emphasis on Asia,” says Mark Steinert, the London-based global head of research. In China alone the bank will have 100 researchers by early next year, five times as many as in 2007.

The Asia-Pacific region has also given a much-needed boost to UBS’s offshore banking business, which has been damaged by the scandal in the U.S. and is under assault in Europe. Switzerland accounts for more than a third of the world’s estimated $6 trillion of unreported offshore banking assets. Neither UBS nor Credit Suisse discloses offshore figures, but according to Mediobanca analyst Wheeler, offshore accounts make up about 15 percent of assets under management at each bank. “Offshore banking remains a core business of wealth management,” says UBS division chief Zeltner.

That business is under threat in Europe, however. New tax agreements on the horizon between the Swiss government and the U.K. and Germany would allow British and German citizens to retain undisclosed bank accounts in Switzerland but would require the bank to pay taxes on those accounts to the clients’ home countries. Once the agreements go into effect, they will almost certainly be extended to other European Union countries. UBS expects foreign clients to withdraw as much as Sf40 billion because of these tax deals, but some fund managers believe the total could be far higher.

Any shrinkage in European offshore accounts would hit UBS’s bottom line hard, says Oliver Flade, Frankfurt-based financial sector analyst for Allianz Global Investors. The Swiss banks “are able to charge clients very high prices on these undeclared assets, and the clients haven’t demanded much service,” he says. “But when they become onshore accounts that compete with banks elsewhere in Europe, the Swiss bank fees will have to come down from 140 to 150 basis points to 70 or 80 basis points, and the banks will have to service these accounts more.”

Although he doesn’t dispute this analysis, Zeltner insists that offshore banking continues to appeal to clients in high-growth emerging markets in Asia for reasons other than tax evasion. He cites the example of an Indonesian industrialist who opted for offshore accounts in Singapore and Hong Kong to get around local laws that limit investments to domestic securities and mutual funds.

Moreover, according to Zeltner, there is a growing synergy between offshore and onshore banking, especially in Asia. Offshore banking hubs in Singapore and Hong Kong are booking centers for clients in China, Taiwan, Japan, Australia and other nations where UBS is in the lengthy and expensive process of building up its onshore presence. That’s why it is important, says Zeltner, “that clients can book wherever they want and we can service them offshore or onshore.”

As the investment bank struggles to regain its once-lofty global standing, wealth management has stepped into the limelight. At this point, says Citigroup analyst Lakhani, “the UBS story is more about wealth management than investment banking.” Wealth management finally showed net new inflows in the third quarter of 2010, though they were a measly Sf1.2 billion — “nothing to write home about,” says Zeltner. Still, during the first nine months of last year, wealth management had pretax profits of Sf1.85 billion, close on the heels of the investment bank’s Sf2.1 billion. By 2014 the wealth management and asset management units are projected to generate Sf7 billion in pretax profits.

In contrast to investment banking, wealth management stands to profit from Switzerland’s more stringent capital requirements. “If our investment bank has to hold more capital than our competitors, then our pricing may be less competitive in capital-intensive trading areas,” says chief financial officer John Cryan. Wealth management, however, “benefits from us being viewed as supersafe,” he contends. Although regulators have not finalized their so-called Swiss finish of additional capital requirements, UBS has promised to raise its core tier-1 capital ratio — now an industry-leading 14.2 percent — to nearly 16 percent by 2014, even if that means continuing a no-dividend policy dating back to the crisis.

But a high capital ratio won’t be enough to generate the client fees and profit margins of the precrisis glory days. “Clients still have scars from the crisis, so their asset allocation is mainly bonds and cash,” says Zeltner. “We need to work the book and bring them back to the equity markets.” UBS also has to persuade clients who lost confidence in the group in recent years to again give the wealth management unit full discretion in managing their money.

Then there is the question of pricing. The $200 billion-plus outflows during the crisis prompted UBS to slash fees and commissions in a bid to slow the stampede. Now that UBS is no longer endangered and is delivering solid investment returns for wealth management clients, says Zeltner, it can demand higher fees.

If all four of these drivers are in place, says Zeltner, the gross margin at UBS Wealth Management will increase from an estimated 93 basis points in 2010 to a target of 100 basis points by 2012. But that will still leave UBS trailing Credit Suisse, which had a gross margin of more than 110 basis points in 2010.

The picture in the U.S. is more challenging still. Wealth Management Americas, run as a separate unit, had $673 billion in invested assets in the third quarter of 2010, compared with $1.6 trillion at Morgan Stanley Global Wealth Management Group and $1.5 trillion at Merrill Lynch & Co.’s Global Wealth and Investment Management unit. Despite the heralded appointment of Robert McCann as chief executive in 2009, WMA’s pretax profit margin of 3 percent in the first nine months of 2010 was far behind the industry norm of 20 percent during the previous ten years. The biggest problem is WMA’s high compensation ratio — 79 percent of revenues for the first nine months of 2009, compared with Morgan Stanley GWMG’s 61.5 percent.

Despite the unit’s pretax loss of Sf99 million in the first nine months of 2010, Grübel insists that “WMA qualifies as a core business.” And he has set a 2014 pretax profit target of Sf1 billion for the unit. “Our aim in the U.S. is to focus on the more affluent client segments — people who, on average, have a million dollars or more in financial assets,” says Grübel. As a measure of his seriousness about the U.S. market, Grübel reassigned his chief risk officer, Philip Lofts, to become CEO of UBS Americas in January.

UBS is also attempting to repair its reputation in Switzerland. Swiss banking operations are targeted to provide annual pretax profits of Sf1.9 billion by 2014, compared with Sf6 billion for wealth management and Sf6 billion for the investment bank. But that doesn’t begin to convey the political importance of the home market, where the financial sector employs 5.8 percent of the workforce and accounts for 12 percent of national income.

UBS’s mishandling of the financial crisis has revived a long-running debate in Switzerland about the dangers of megabanks in such a small country. “The big Swiss banks have a long history of changing the financial landscape because of their involvement in huge scandals,” says Hans Geiger, a banking scholar at the University of Zurich. He cites the so-called Chiasso affair in 1977, when Credit Suisse lost some Sf3 billion — equivalent to most of its capital at the time — in a case involving fraud by one of its bankers. That led to higher due-diligence requirements and more-stringent know-your-client rules for Swiss banking.

The UBS fiasco and resulting bailout could prompt more dramatic regulatory reforms. Early this year the Swiss Parliament will consider a government commission’s recommendation that Switzerland rescue only the domestic banking operations of the two big banks if there is another crisis. While popular among substantial numbers of voters, the proposal arouses skepticism among banking experts. “I don’t see how one part of a bank can be rescued and the other allowed to fail,” says Manuel Ammann, director of the Swiss Institute of Banking and Finance at the University of St. Gallen. “When confidence evaporates, usually the whole bank goes down.”

In the meantime, UBS is pursuing a whirlwind courtship of its Swiss base. In the midst of its cost-cutting campaign, UBS announced a $300 million renovation of its 300 Swiss branches — largely ignored during its global push — over the next three years. With 1.3 million clients nationwide, or one out of every third household, UBS has a large-enough domestic presence. “We aren’t trying to attract more clients, but to sell more products to the ones we have,” says spokesman Peter Hartmeier. Every year Sf4 billion to Sf5 billion of retail assets migrate to wealth management. “The retail bank has become a feeder business to wealth management,” says COO Körner.

By last summer, UBS felt it had achieved enough of a turnaround to launch its first global branding campaign since the crisis began, under the slogan “We will not rest.” According to Grübel, the slogan is meant to convey “that we know what we are doing and that we are looking after our clients.”

Grübel himself promises not to rest, either, until his job is done. “Do I look like I am about to retire?” he says in response to the inevitable question about his advancing years. “From the beginning, I said I wanted to stay long enough to get UBS back to sustainable profitability. We are profitable again, but it isn’t yet as sustainable as I want it to be.” According to his goals, that point should come in 2014, when he will be 71. Grübel points out that there is no retirement age at UBS. “A chief executive can stay until he drops dead,” he says, but adds, “I hope the board will replace me before then.”