UBS Warns of 'Further Heavy Write-Downs'

UBS confirms facing further write-downs
By Haig Simonian in Zurich
July 4 2008 12:12
Financial Times

UBS on Friday confirmed it faced further heavy write-downs on exposures to troubled US credits, meaning earnings for the second quarter would be “at or slightly below” break even.

Europe’s biggest casualty of the US subprime crisis did not quantify its latest write-downs, which analysts have estimated at up to $7.5bn. The Swiss bank said it had continued to make money in wealth and asset management, but suffered renewed losses in investment banking.

UBS said the impact of the latest losses left its Tier 1 capital ratio at about 11.5 per cent on June 30, and stressed it had no need to raise fresh capital.

The news reassured investors. UBS shares jumped 8.2 per cent higher at the open but settled back to stand 1 per cent higher at SFr21.24. The shares have lost two-thirds of their value over the past year.

The bank has raised about SFr30bn ($29bn) in recent months, mainly through a rights issue and sale of shares to strategic investors.

UBS gave an indirect indication of its latest markdowns by noting that its second quarter results would benefit from a tax credit of about SFr3bn in connection with its massive losses to date.

Working backwards, and assuming roughly normal profitability of up to SFr2bn in wealth and asset management combined, that implies a loss of at least SFr5bn in investment banking to produce break-even.

UBS said its latest write-downs had stemmed from the effect of “further market deterioration” on previously disclosed positions, particularly adjustments to the value of its exposures to monoline insurers.

At the time of its first quarter results, UBS disclosed it had exposures of about $6bn to monoline insurers – a position viewed as ominous by many analysts given the concerns, and subsequent ratings downgrades – of many monolines.

The bank also confirmed fears that its problems with subprime, and broader reputational damage, had eroded its until-recently blue chip private banking franchise. UBS said group net new money had been negative in the second quarter, though it did not distinguish between wealth and asset management.

It added that outflows had been most severe in April, but had improved in May and June, especially in wealth management.

The profits warning had been expected, but for July 1, immediately after the end of the second-quarter trading period and in line with the bank’s practice in two earlier quarters. Instead, UBS that day released information about important corporate governance changes, but said nothing about earnings.

UBS officials said Friday’s statement represented “voluntary disclosure”, in the sense of refining existing guidance to investors, rather than an obligatory announcement triggered by market rules requiring profits warnings when circumstances showed “material differences” compared with previously available information.

Full results for the second quarter will be published on August 12.