Knight Vinke Intensifies Pressure On UBS AG

Knight Vinke Asset Management intensified its pressure on UBS AG. The activist investor has been urging the Swiss banking giant to spinoff its Investment banking unit.

Knight Vinke Intensifies Pressure On UBS AG

In its latest letter to UBS, Knight Vinke noted that the tone of the board of directors of the Swiss bank was “frustrated and exasperated” for having to answer its questions. The activist investor clarified that its intention was to seek open, intelligent and transparent response from the bank’s board.

Knight Vinke seeks open, intelligent, transparent response from UBS

Knight Vinke emphasized that billions of shareholder value was destroyed based on the history of the financial services industry particularly the investment banking sector. The destruction of shareholder value was caused by the actions of the board of directors and senior managements, who failed to prevent it from happening. The activist investor pointed out that the leadership of UBS is not exempted.

Knight Vinke stressed that investors have the right to question the board of directors particularly when the issues raised are related to governance.

The activist investor said,” A Board that claims to have learned the lessons of the past, must be prepared to listen carefully to criticism, should address the issues directly rather than avoiding them and, where conflicts of interest with management are alleged, should do so independently.”

Knight Vinke pointed out that UBS through its CFO Tom Naratil failed to address its concerns, and challenged the Swiss banking giant to respond in an open, intelligent and transparent way.

Knight Vinke’s concerns on UBS

On March 27, Knight Vinke sent a letter to UBS and raised its concerns that the Swiss banking giant “may be in breach of undertakings” given to shareholders in 2008 to 2010 in connection with its strategy in funding its business activities particularly the Investment Bank.

Knight Vinke was also concerned that the financial information published by UBS particularly its segmental accounts provided a misleading picture of the true profits and losses of the Investment Bank.

The activist investor noted that UBS’ Investment bank suffered catastrophic losses (over 10% of Switzerland’s GDP) during the financial crisis. Knight Vinke emphasized that the overarching causes of the losses was the failure of UBS to charge an appropriate risk-adjusted cost of capital for the activities of the Investment Bank.

Knight Vinke noted that Mr. Naratil emphasized the fact that UBS management believes that the Investment bank will not be able to fund itself as a stand-alone company, and it might even be regarded as an investment grade. The Investment bank also needs a higher capital to operate separately.

The activist investor concluded that UBS was bearing a huge burden to support a business with lesser economic profits than reported profits. Knight Vinke added that Investment bank “may be fundamentally unviable without substantially more capital.”

Knight Vinke pointed out that UBS needs to be radically streamlined…with a new strategy and possibly under new management—or absorbed into an organization that is better able to take on this task.”

The activist investor believed that the burden of carrying the unprofitable Investment bank was “fundamentally an issue of governance” as reflected by the recent stock market performance of UBS.