Writedown cloud has silver lining for rivals

Like a rabbit caught in the headlights, investors have been transfixed by the travails of UBS, the Swiss bank that will on Thursday report the first loss in its history because of writedowns on its US subprime holdings.

UBS’s results presentation promises to be packed as analysts assess the scope for further damage on the US portfolio, last standing at $29bn, and the dangers of contagion to superior categories of paper.

Attention will also focus on any insights into UBS’s hunt for a head of investment banking to relieve Marcel Rohner, its chief executive, who assumed the job temporarily last autumn.

But beyond the shadow cast by UBS, the biggest European casualty of the subprime meltdown, the broader picture for Swiss banks remains bright.

On Tuesday Credit Suisse unveiled record profits of SFr8.55bn ($7.8bn), in spite of SFr3bn in US writedowns. Last year’s earnings were below the SFr11.3bn posted in 2006, when profits were inflated by SFr3.1bn in income from discontinued businesses. But the figure was 3 per cent above the adjusted previous total.

Although investment banking could not avoid the impact of market turbulence, Credit Suisse’s writedowns last year amounted to SFr3bn, compared with about seven times that at UBS. And, in spite of the turmoil, the division remained profitable in the fourth quarter, with pre-tax profits of SFr328m. For the full year, profits in investment banking declined by 19 per cent to SFr4.83bn.

Other Swiss banks have reported similarly satisfying results. Julius Baer, the private banking and asset management group that leapt in size after buying four UBS operations in 2005, last week revealed net profits up by 31 per cent to SFr1.14bn last year.

Switzerland’s cantonal banks, some of which have already reported, have also done reasonably well on strong retail business and a buoyant domestic economy.

Zürcher Kantonalbank last week reported net earnings for 2007 down to SFr843m from SFr947m, mainly because of weaker trading in the second half. But the total was still the second-best in the group’s 138-year history.

Others yet to report, including quoted private banks such as Sarasin and EFG, should also report healthy figures.

The reason for the difference between UBS and its rivals is that no other Swiss bank, apart from Credit Suisse, shares its business model. And Credit Suisse appears to have spotted the warning signals in subprime much earlier than its rival.

Even in leveraged loans and commercial mortgage backed paper, where Credit Suisse remains a major player, it lowered exposures – and at relatively low cost.

Leveraged finance exposures fell to SFr36bn in the fourth quarter from SFr58.6bn in the third quarter, while commercial mortgage backed securities declined to SFr25.9bn from SFr35.9bn.

“The reason UBS is so different is that it has undergone a massive expansion in America and accordingly took much bigger positions than other banks,” says Professor Giovanni Barone-Adesi, of the Swiss Finance Institute.

That the growth in the bank’s US business, inflating its balance sheet, failed to set off alarm bells stemmed from the fact that UBS’s hallowed risk controls failed to see the troubles ahead.

“The problem is with the credit risk assessment models,” says Prof Barone-Adesi. “About every 10 years or so, there is a crisis. They assumed that, because of the arrival of wider spreading of credit risk, that wouldn’t happen again. And, of course, they were wrong.”

Swiss banks with more modest ambitions avoided that fate. “Most other banks have focused on their core activities of private banking and asset management,” notes Prof Barone-Adesi.

“Private banking is still a very attractive area. Business is growing, margins are stable and it doesn’t need much capital,” says Thomas Kalbermatten, analyst at Credit Suisse.

Julius Baer’s results showed even focused banks were not immune: market turbulence affected trading income, while falling share prices and currency factors depressed clients’ portfolios, on which management fees are based.

But such negatives were overshadowed by the buoyant world economy. Baer, like EFG, Sarasin and Geneva-based Pictet, has been recruiting bankers and opening new offices to tap into significant wealth creation.

In Baer’s case, net new money in private banking advanced by SFr12bn last year, in spite of the currency and market factors.

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