UBS writedown

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Incredibly, just 90 minutes after UBS revealed $10bn of losses on Monday morning, its shares were back in the black. On top of the $4bn writedown announced by Switzerland’s largest bank in October, further subprime hits, even on this scale, were clearly discounted. Shareholders may have also been comforted by the planned $11.5bn injection of new capital from two strategic investors. Another explanation is that, despite being given an opportunity for doing so, UBS’s management offered no warnings for any of its other businesses not exposed to subprime.

Are investors being too optimistic? That UBS is raising capital is good news. A forecast Tier 1 capital ratio of 12 per cent – a full 4 percentage points above the European banking average – may well look conservative, but if financial conditions deteriorate next year, a strong balance sheet will be appreciated. It also makes sense for UBS to lock in strategic investors early. The Singapore Government Investment Corporation plans to subscribe to about $8bn of new notes, which, when converted, will give it 9 per cent of the bank. A Middle Eastern investor is stumping up almost $2bn. Such funds are not bottomless pits – if the credit crunch tightens, financial stakes will be much harder to sell.

But investors should be less sanguine about writedowns and earnings. The ongoing credit crisis is beginning to echo 1990s’ Japan, when bad news about non-performing loans in the banking sector emerged in fits and starts. After a time, markets can become numb to very large numbers, and investors lose faith in their accuracy. Then, not even good news is rewarded.

Eventually, it all comes out in earnings. This latest loss means that UBS’s full-year net profit will probably be negative. Nor is it immune to a possible downturn in markets next year: investment banking and asset management account for half of operating profits. Investors willing to pay up to 15 times forecast earnings for exposure to wealth management must really want to own a bank.

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