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UBS Quits Energy Trading as Part of Bank's 'Repositioning'

UBS became the latest casualty of the economic crisis Friday as the financial bank reported it is tightening its focus on its "core strengths," cutting jobs and downsizing some businesses, while exiting others completely. The company, which was ranked by NGI as the twelfth largest North American natural gas marketer during the second quarter of this year, said it is exiting commodities trading -- with the exception of precious metals -- in its Fixed Income business.

Under the "repositioning" strategy," the bank said it will reprioritize its business portfolio to preserve its core strengths and client franchises across Equities, the Investment Banking Department and Fixed Income, Currencies and Commodities (FICC). Along with the downsizing or exiting of certain businesses, the company said its plan will lead to greater efficiencies and a further reduction in the investment bank's headcount and balance sheet.

"The ongoing crisis in the financial markets and dramatically changed industry dynamics require us to recalibrate our business," said UBS Investment Bank CEO Jerker Johansson. "While the revenue outlook is uncertain, these measures will allow us to focus on our strengths, reduce the cost base to a more sustainable level and position our core businesses for growth once fundamentals improve."

UBS, which has been a significant player within the natural gas marketing arena, appeared to have been cutting back even prior to this announcement. While the bank presided over the twelfth largest North American natural gas marketing operation during 2Q2008, moving 3 Bcf/d (see NGI, Sept. 22), that volume was down 41% from the 5.1 Bcf/d the company transacted during 2Q2007.

As for whether the bank would sell its energy trading book, a UBS spokesperson said it is too early to tell. "As of right now, we have only said we are exiting commodities," said Kelly Smith, a UBS spokesperson. "We don't have any insight on where it is going or what is going to happen to it. Maybe by next week or so we'll have some of those answers."

Smith also clarified that the exiting commodities announcement pertained only to the UBS Fixed Income business. "In our Equities business we have an Exchange Traded Derivatives Commodities [ETD] business, and that is not being shutdown. The ETD is part of our Prime Services, which is our prime brokerage group that works with hedge funds." She noted that in energy, this group deals with oil, petroleum products, natural gas, power and emissions.

UBS put significant focus on its energy trading business in early 2002 when it acquired Enron Corp.'s trading arm through a deal with the U.S. Bankruptcy Court in New York (see NGI, Feb. 11, 2002). Under that deal, which reportedly included nearly 650 former Enron employees, UBS did not pay anything up front or assume any of the trader's debt.

As part of the repositioning, UBS said it will:

UBS said it has already taken a number of actions to reduce its balance sheet, implement a new market-based funding model, and reduce risk and headcount. The bank said Friday's move will lead to further reductions, with the aim of bringing the cost base to a more sustainable level.

The company will reduce net headcount by an additional 2,000, bringing staffing levels to approximately 17,000 by year-end, a reduction of around 6,000 since the peak in 3Q2007. UBS said reductions will be predominantly targeted to businesses being exited or downsized in order to protect and sustain the bank's core client franchises.

"A right-sized Investment Bank, positioned alongside the world's premier Wealth Management and leading institutional Asset Management business, will enable UBS to position itself as one of the core group of universal banks that are likely to dominate in this redrawn landscape," said Johansson.

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