UBS is mulling a spinoff of its investment banking business as regulators are demanding more capital, according to Mediobanca SpA analysts.

UBS ROE target delayed

UBS, Switzerland’s biggest bank, said in October that its ambition to reach its 15% return on equity target in 2015 will be delayed by at least a year unless the regulator removes its demand.  UBS still expects to be able to boost its Basel III common equity ratio to more than 13% in 2014.  However the regulator’s demands for higher risk weightings to be assigned to litigation and compliance matters would delay the bank’s targeted goal.

Switzerland’s finance minister said current leverage ratios are too low and banks have to consider whether to keep securities businesses.  Analysts led by Christopher Wheeler of Mediobanca in a recent note to clients believe these events have resulted in UBS dusting off plans for disposing of the investment bank.

The analysts point out that with competitors unlikely to make a bid for the operations, UBS could spin off its investment banking unit to existing shareholders and create a London-based firm with stock traded in the U.K. Moreover, UBS AG (NYSE:UBS) may revive the S.G. Warburg brand, a name that disappeared after the merger between UBS and Swiss Bank Corp. in 1998.

UBS’ focus on core business

Chad Bray of Dealbook points out that UBS has undertaken a number of efforts in the past year to reduce its investment bank and shift focus away from riskier trading activities to its wealth management and retail operations. The bank cut 10,000 jobs last year as part of the overhaul.

As part of its reorganization initiatives, in November, UBS combined its currency, interest rates and credit trading businesses.

Last month, the Swiss banking giant has reached an agreement to divest its Corporate Employee Financial Services International business to London-based Montagu Private Equity.

The divesture is part of UBS’ endeavors to focus on core businesses and downsize troubled segments. Notably, UBS AG (NYSE:UBS) has been experiencing challenges in the investment banking business, as reflected in the deterioration of its performance over the past few quarters.

In the note to clients, Mediobanca analysts point out that while the smaller UBS would suffer a loss of earnings from the investment bank, it would benefit from a lower risk profile. The analysts believe a spinoff may offer shareholders a 14% upside.