UBS counts the cost of subprime after “annus horribilis”

August 10, 2008
Singapore Democrats

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AFP

Swiss banking giant UBS will unveil its second quarter results Tuesday still scarred from its subprime-related “annus horribilis” and the loss of billions of dollars — and wealthy clients.

Nearly a year to the day after it first revealed it had some exposure to the crisis in the US housing mortgage sector — and after posting writedowns worth a phenomenal 37 billion dollars — UBS will attempt to assure investors the worst is finally behind it.

The results will be sweetened somewhat by an unexpected three billion Swiss francs in tax credits, with analysts expecting results to be either flat or slightly negative, after three consecutive quarters deep in the red.

The tax credit will offset a further wave of writedowns expected between 4.7-5.6 billion dollars.

All eyes will be on the bank’s key wealth management division which has seen customers take their business elsewhere over the past twelve months.

Zuercher Kantonalbank analysts expect the division to be down 23 billion Swiss francs in the quarter, following on from the 12.8 billion Swiss francs withdrawn in the first three months of the year.

Helvea analyst Peter Thorne said it will be “interesting to see if this trend continues” in the next quarter, which could prove highly ominous for the bank’s overall reputation.

Just a year ago, UBS was practically a byword for safe, reliable and trustworthy investments. But the past twelve turbulent months have seen its shares lose 66 percent of their value, and its market capitalisation halve to 45.3 billion dollars from nearly 90 billion.

The bank now ranks 25th in the world in terms of market cap, but has the dubious distinction of being in the top three — behind US peers Citigroup and Merrill Lynch — in terms of share devaluation.

UBS has attempted to undergo “shock therapy” to turn around its fortunes, hiving off part of its troubled investment banking arm, and cutting around 5,500 jobs.

The most striking symbol of the bank’s bid to turn the page was the resignation of veteran chairman Marcel Ospel on April 1, and his replacement by in-house lawyer Peter Kurer.

UBS also turned to foreign investors to shore up its balance sheet, notably Singapore’s state investment fund GIC which is now the bank’s biggest shareholder.

But the bank’s woes are far from behind it, and certainly not in the key American market.

Just on Friday, UBS agreed to buy back 18.6 billion dollars’ worth of stressed securities in a deal with US authorities.

UBS said it would endure a pre-tax charge of around 900 million dollars related to its settlement. Analysts say other banks are also likely to undergo financial hits from the buybacks.

The bank’s accord to repurchase auction rate securities (ARS) it was involved in marketing marks the largest such buyback so far secured by the US authorities.

US banks and UBS marketed billions of dollars’ worth of the complex securities in recent years, but the market for ARS imploded in February amid a broadening credit crunch that contributed to the collapse of the US bank Bear Stearns in March.

Auction rate securities, essentially debt instruments issued by financial firms, municipalities and student loan companies, typically have a fairly lengthy maturity. But the interest rates on such securities can be volatile and change at auctions run by the banks.

They provided a rich business for many banks prior to the market’s collapse in February which left panicked investors scrambling to redeem their holdings and nursing paper losses.

UBS was also forced last month to halt its offshore banking services for US citizens after it came under scathing criticism for facilitating massive tax evasion.

UBS and the smaller LGT Bank in Liechtenstein were singled out in a 115-page report on the investigation into an estimated 1.5 trillion dollars in overseas tax havens, led by US Democratic Senator Carl Levin.

Former UBS banker Bradley Birkenfield had already pleaded guilty to conspiring to help US clients evade millions of dollars in taxes by hiding assets in Switzerland and Liechtenstein.

http://www.afp.com/english/news/stories/newsmlmmd.6fdcc5a7a0f322f6a75b20aecd21680e.b11.html