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ANALYSIS-UBS CEO Gruebel could teach CS pupil Dougan a lesson

Published 09/01/2010, 10:41 AM
Updated 09/01/2010, 10:44 AM

* Gruebel's experience could give UBS edge as markets cool

* CS may have hired too aggressively in investment banking

* UBS stock has further potential after rising on Q2 numbers

* Gruebel still has to stop client money leaving bank

By Jason Rhodes and Martin de Sa'Pinto

ZURICH, Sept 1 (Reuters) - Battle-scarred UBS boss Oswald Gruebel's strength in the face of adversity could give his bank the edge in testing months ahead as he fights former charge Brady Dougan, CEO at Credit Suisse, for Swiss banking supremacy.

Gruebel, himself a former Credit Suisse chief, was lured out of retirement in February 2009 to turn around UBS, Switzerland's top bank, after it wrote down more than $50 billion on toxic assets in the credit crisis and posted Switzerland's biggest-ever corporate loss in 2008.

Dougan, a youthful-looking 51-year-old economics graduate with an MBA from the University of Chicago, headed investment banking at Credit Suisse under Gruebel and later helped CS rip market share from its weakened nemesis during the crisis.

But since Gruebel arrived at UBS on Feb. 26, 2009 -- close to the low point of the financial crisis -- its shares have rallied around 60 percent and outperformed Credit Suisse, which had fared far better through the crisis.

"He (Gruebel) had a phenomenal track record at CS, and now at UBS he has the opportunity to give a repeat performance," said a banker who has worked with both Gruebel and Dougan.

There's still plenty to do. UBS shares shares still trade at less than a quarter of their peak in 2007, while CS shares are at just below half their peak, but this year UBS has risen 7 percent compared with a 10-percent fall in CS.

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Graphic showing relative performance of UBS and Credit Suisse http://r.reuters.com/nah68n

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UBS has further potential to outperform this year, particularly if Gruebel succeeds in his top priority of stopping clients leaving the bank in droves now the United States is set to drop a damaging tax fraud case.

Motor racing fan Gruebel hopes a sponsorship deal with Formula 1 will help attract clients in growing wealth management markets like Asia and South America and that a major new advertising campaign can re-establish faith in the bank.

UBS curbed proprietary trading activities to reduce risk and increase liquidity in the crisis and Gruebel's tight rein on risk and costs enabled UBS's fixed income, currencies and commodities (FICC) operations to power group profit in the second quarter, while Credit Suisse's investment banking activities struggled amid flagging markets.

"When the market turned in the second quarter, CS did not outperform as expected," said ZKB analyst Andreas Venditti. "UBS's FICC target was 2 billion Swiss francs for the quarter. Nobody expected it to be that high, but they did it."

Dougan hired investment bankers aggressively in the second quarter just as markets flattened, and his bold strategy could backfire in the third and fourth quarters.

Trading activity is going to be weak until first quarter 2011, said Vontobel analyst Teresa Nielsen, who sees both banks as better plays than U.S. and European peers because of their superior capital positions and balance sheets.

"In this environment UBS is the better placed of the two because it hasn't hired as many people," Nielsen said.

TURNAROUND KING

Gruebel, a former Deutsche Bank trader, is admired by peers as a fighter who possesses deep knowledge of investment banking, wealth management and commercial banking at a time when most banking executives tend to be specialists.

He has pushed through changes to take UBS to three consecutive quarters of profit after a string of losses.

"Gruebel's experience and gravitas were vital for UBS in the dark days," said Helvea analyst Peter Thorne.

The turnaround took some tough decisions, like cutting 11,000 jobs to 65,000 and selling a jewel in UBS's crown -- Brazil's wealth management unit Pactual -- for $2.5 billion just three years after buying it for around the same price.

Analysts said Dougan may need to show the same resolve to axe excess fat if his investment banking bet turns sour, and go well beyond the 75 cuts made in Britain in August. To do that, Dougan would have to admit misjudging the market.

That could put him under as much pressure as he has yet faced, they said, and it was unclear how he might react.

Gruebel, it seems, thrives on that kind of pressure.

A German who was instrumental in shaping the universal banking model in his adopted Switzerland, Gruebel stepped down at the height of his success at Credit Suisse after turning the bank around from a 3.31-billion Swiss franc loss in 2002.

Gruebel never landed the job of chairman at Credit Suisse and many in Zurich's banking world suspect he still has ambitions of chairing a top bank, though people close to Gruebel say he has no such designs.

"He wants to get his hands dirty. He's a man of action, he wants to move things as a CEO," said an investment adviser who worked with Gruebel at CS.

Dougan was the surprise successor to Gruebel as CS boss in May 2007. He was chairman Walter Kielholz's choice for the top job rather than Gruebel's and there was some friction in the boardroom over the appointment Gruebel's successor, the banker close to Gruebel and Dougan said.

Dougan, an American reluctant to learn German -- despite reportedly learning Japanese within a year much earlier in his career -- returns home to the States regularly. He steered CS safely through the credit crisis without government aid, but was able to build on the strong position Gruebel bequeathed him.

Gruebel gave up lucrative share options at Credit Suisse to take on the challenge of restructuring UBS and opted to forego a bonus this year to placate Swiss taxpayers angry at shelling out 6 billion Swiss francs to save the bank before he became CEO.

Dougan meanwhile irked the Swiss public by becoming the country's highest paid executive, pocketing around 90 million francs ($88 million) in a year, including bonuses matured under a five-year plan.

"Gruebel wants to leave a long lasting legacy and also to give something back to Switzerland," the investor advisor said, adding Dougan would eventually return to the United States for good.

"Dougan's not emotionally attached to Switzerland," he said.

(Editing by Sitaraman Shankar)

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