"The divisional separation is likely to fuel speculation [of an investment banking unit sale]," London-based stockbrokers Keefe, Bruyette, & Woods (KBW) told clients in a research note. The analysts added that any sale would be impossible before the division gained full independence by the end of 2009.

Along with the future of the UBS investment banking division, investors are fretting about the mounting withdrawals from the wealth management unit. A string of high-profile gaffes, including the detainment of several current and former UBS employees [BusinessWeek.com, 5/23/08] in relation to U.S. tax evasion, has led many wealthy clients to run for the door. The bank's outgoing chief financial officer, Marco Suter, told investors on Aug. 12 that the outflows were "disappointing but not surprising." He added: "Reputation issues are having a growing effect on the global wealth management business."

Capital Infusions Others take a harder line. "The withdrawals from the wealth management business are the most disturbing part of all. For many of the Swiss, the strength of UBS is a sign of their country's virility," says Tower Group's McDowall.

In the short term, the might of the Swiss financial giant will continue to be strained after Rohner said he didn't "expect any improvement in current adverse economic and financial market trends" in the second half of 2008. While UBS reduced its exposure to risky assets by $27 billion in the second quarter, it still has $50 billion tied up in bad debts, predominantly in the U.S.

To offset losses, the bank previously turned to shareholders for extra cash, including the government of Singapore and an unnamed Middle East investor that injected $11.5 billion [BusinessWeek.com, 12/10/07] late last year. If the bank's financial health doesn't pick up soon, analysts fear shareholders may balk at investing any more money.

After being hit with multibillion-dollar losses linked to U.S. subprime assets, the UBS board can only hope that greater autonomy for the bank's units will create the flexibility needed to navigate the choppy economic waters. "We are not done with our work," says CEO Rohner. "But we have taken steps to deal with the outstanding issues."

Story Source: Business Week