Market eager for UBS rescue plan

UBC chairman Marcel Ospel must raise some cheer Keystone

UBS investors are waiting to hear how Switzerland's largest bank plans to extricate itself from the mess brought about by the United States subprime mortgage crisis.

The bank is expected to announce how it will repair its investment banking arm, which incurred most of the $18.4 billion (SFr20 billion) losses. These writedowns resulted in a SFr4.4 billion ($4 billion) net loss for 2007.

UBS axed its investment bank head, Huw Jenkins, in October while announcing 1,500 job cuts in the division. Other senior managers also left the bank last year while chief executive Marcel Rohner took temporary charge of investment banking.

Documents leaked earlier this month pointed to UBS cutting down its operations in the risky real estate and securitisation businesses that typically takes illiquid assets, such as mortgages, as collateral against cash loans. It may also cut some trading activities in the US, according to reports.

The investment banking division had broken the UBS One Bank philosophy by acting too much on its own impulses, according to Bank Sarasin analyst Rainer Skierka.

“Shareholders are upset that some greedy investment bankers brought the bank near to the edge of the cliff. The division had a life of its own,” he told swissinfo.

“We need a clear strategic road map showing how it will become more oriented in its underlying behaviour towards the wealth management and asset management businesses. The bank needs to reinvent itself to some extent.”

Heads will roll

Zurich Cantonal Bank analyst Andreas Venditti expects heads to roll when restructuring details are spelled out, probably at the bank’s annual results announcement on February 14.

“Some businesses will be cut down substantially as part of their balance sheet clean up operation. The market also expects some news on the reduction of risk taking on their books,” he told swissinfo.

Experts agree that it is also important to get a clear indication of UBS’s outstanding exposure to risky investments. The bank said in December that $29 billion of its assets were still on shaky ground.

“We need to know how this is structured and the full extent of risk exposure,” Skierka said. “It is not very nice sitting in front of a snake if you are unable to move. That is how it feels if you can’t actively manage your exposure.”

Of particular worry are $2 billion of non-subprime losses also relating to the US residential mortgage sector. This could imply exposure to ailing monoline insurers, which guarantee bond repayments – the latest source of concern on the financial markets, according to Skierka.

Emergency bailout

Finally, UBS shareholders will meet on February 27 to vote whether to accept SFr13 billion of emergency funding from Singapore and Middle East investors.

While this proposed cash injection deals with the symptoms rather than the cause of the pain, it is still a crucial step to restoring client confidence in the wealth management business.

“UBS does not need the extra funds in a technical sense because it can absorb the losses on its own. But clients would feel more comfortable if the bank had more capital,” said Venditti.

swissinfo, Matthew Allen in Zurich

Key facts

On Wednesday UBS announced a further $4 billion (SFr4.4 billion) writedown of investments exposed to the collapsed US subprime mortgage sector.
This brought total subprime related losses for the bank to $18.4 billion.
As a result the bank said it would report a 2007 net loss of SFr4.4 billion next month.
This compares with a SFr12.26 billion net profit in 2006.

In brief

UBS endured a stormy 2007, starting with the collapse of its hedge fund Dillon Read Capital management. Two months after that, in July, chief executive Peter Wuffli abruptly departed without clear explanation.

In October of last year UBS said it would cut 1,500 jobs in its investment banking arm, including its head Huw Jenkins. UBS chief financial officer, Clive Standish, left at the same time.

Later that month the bank announced it was writing off SFr4.2 billion on subprime losses and SFr726 million pre-tax loss for the third quarter – the first quarterly loss in nine years.

In December UBS said another $10 billion would be written off as the US subprime crisis deepened.