UBS faces more US credit writedowns

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UBS confirmed on Friday that it faced more heavy writedowns on its US credits, meaning that it would break even or make a loss in the second quarter.

Europe’s biggest casualty of the US subprime crisis did not quantify the writedowns, which analysts have estimated at up to $7.5bn.

The bank said it had continued to make money in wealth and asset management but suffered renewed losses in investment banking. UBS has written off about $38bn since the start of the subprime crisis.

The bank stressed that it had no need to raise funds, saying its latest losses would leave the bank’s Tier 1 capital ratio at about 11.5 per cent as of June 30.

UBS has raised more than SFr30bn ($29.2bn) this year, mainly through a rights issue and sale of shares to strategic investors.

Bank shares, which have fallen heavily in recent weeks, initially recovered on the news, jumping more than 8 per cent. But by the close of trading, the stock was down 2.57 per cent at SFr20.48, well below the SFr21 a price of its recent SFr16bn rights issue.

Citigroup said, in a note to investors: “While [Friday’s] statement rules out an immediate capital increase, we believe that the Swiss regulator’s increased focus on the leverage ratio suggests harsher capital requirements ahead.”

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 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 writedowns 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 that it had exposures of $6.3bn to monolines – a position viewed as ominous by many analysts given the concerns and subsequent ratings downgrades of many bond insurers.

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

The bank added that outflows were most severe in April but said matters improved in May and June, especially in wealth management. Full results for the second quarter will be revealed on August 12.

UBS on Friday failed in an attempt to move a lawsuit with HSH Nordbank over UBS’s alleged mismanagement of a $500m portfolio of collateralised debt obligations to London. The case, which is set to be heard in New York, was among the first to be filed over subprime mortgage losses in the wake of the credit crunch. UBS said it would seek to take the case to the Court of Appeal, given its possible impact on similar disputes.

Additional reporting by Megan Murphy in London

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