UBS needs to make around 1,250 investment banking redundancies, or could just get rid of 50% of its traders

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Why is UBS's investment bank so maligned?

A brief look at its profitability in the second quarter holds the answer: while other banks (Deutsche/BAML) rely on their investment banks as great big generators of profits, UBS doesn't. Its investment bank is a bit player on its profits production line. In the second quarter, UBS's investment bank generated only 22% of the bank's profits -and accounted for 40% of its costs.

Something must clearly be done. Costs at the investment bank are increasing faster than revenues - the cost ratio was 80.2% in the first half, up from 69.3% in the first half of 2010.

Efforts have been made to arrest this: people have been hired, risks have been taken; to no avail. Headcount in the investment bank rose by 148 people in the first quarter. VaR rose 56% year-on-year in the Q2; sales and trading revenues fell 28%.

So what next?

Pay reductions, clearly. Compensation per head at UBS's investment bank is down 20% in the first half (to CHF 191k). And redundancies, inevitably.

Overall, UBS says it wants to reduce costs by CHF 1.5bn-2bn over the next two to three years. Bloomberg suggests the investment bank will cut another 600 jobs, mostly in the back office. But this looks optimistic.

Headcount accounts for 75% of the cost base at UBS. And 39% of all headcount expenses are attributable to the investment bank. If the investment bank is to share the cost cutting equally, this implies compensation cost savings of up to CHF585m in the next three years and the elimination of 1,250 people.

This could turn out to be optimistic.

Now that UBS has given up on its earnings targets, it's looking strategically flocculent. FICC traders are surely at great risk of being sheared off. In today's investor call, Oswald Gruebel said that although more than 50% of what UBS investment bank does is directly related to UBS's other (more profitable) operations, the other 50% isn't. The, "big question," said Oswald, is how large the trading business needs to be in future.

The answer may yet turn out to be not very large at all. All will be revealed at the investor day in November.

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