Swiss banking giants risk client flight over subprime: analysts

Credit Suisse Topples UBS as CEO Dougan Dodges `Suprime Bullet'

By Elena Logutenkova

Feb. 11 (Bloomberg) -- Credit Suisse Group is earning more than UBS AG for the first time in almost a decade after Chief Executive Officer Brady Dougan avoided the writedowns that forced his rival to report the biggest-ever quarterly loss by a bank.

Credit Suisse may report tomorrow that net income fell 69 percent in the fourth quarter to 1.43 billion Swiss francs ($1.29 billion), according to the median estimate of 11 analysts surveyed by Bloomberg. UBS, which marked down $14 billion on securities infected by U.S. subprime mortgages, gives details of its 12.5 billion-franc quarterly loss on Feb. 14.

Dougan, a former derivatives trader who became Credit Suisse's CEO in May after making investment banking the company's most profitable unit, scaled back debt holdings before the slump led to more than $145 billion in writedowns and loan losses at the world's biggest banks. By contrast, Marcel Rohner was named UBS's CEO in July after three quarters of declining earnings, the collapse of a hedge fund and the ouster of his predecessor.

``Credit Suisse is clearly the better positioned of the two,'' said Florian Esterer, who helps oversee $56 billion at Swisscanto Asset Management in Zurich, where both companies are based. ``There are still some tough times ahead for UBS.''

UBS, the world's biggest wealth manager, said Jan. 30 it had a net loss of 4.4 billion francs in 2007, the first time it earned less than Credit Suisse since being created in a merger in 1998. Credit Suisse, which posted losses in 2001 and 2002, had an 8.65 billion-franc profit last year, analysts estimate.

Wall Street Losses

Credit Suisse earned about 1 billion francs in the fourth quarter and 8.2 billion francs in 2007, Sonntag newspaper said Feb. 10, citing an unidentified ``reliable source.'' Credit Suisse spokesman Marc Dosch declined to comment on the report.

Like New York-based Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley, which also reported record losses in Wall Street's worst ever quarter, UBS has turned to sovereign funds to shore up its finances. The Swiss bank will seek shareholders' approval on Feb. 27 to sell 13 billion francs in bonds that will convert to shares to investors in Singapore and the Middle East.

UBS dropped 49 percent in the past year in Zurich trading, making it the fourth-worst performer in the 60-member Bloomberg Europe Banks and Financial Services Index. Credit Suisse fell 35 percent. UBS is rated ``sell'' by 11 of 41 analysts tracked by Bloomberg, a rating awarded by six of 37 analysts covering Credit Suisse.

`Dodged the Bullet'

``I think Credit Suisse will have dodged the subprime bullet,'' said Dieter Buchholz, who helps manage $107 billion at AIG Private Bank in Zurich, including Credit Suisse shares. Chairman Walter Kielholz has signaled the bank probably won't have large charges in the quarter.

Credit Suisse's results may be more similar to those of Frankfurt-based Deutsche Bank AG than UBS, Buchholz said. Germany's biggest bank said last week it avoided writedowns from the subprime market and reported a 44 million-euro ($64 million) markdown on leveraged loans.

Managers at Credit Suisse's SPS mortgage-servicing unit alerted the executive board more than a year ago to concerns about subprime assets. By the end of 2006, the company had originated about 40 percent fewer subprime mortgages than in 2005, according to Dougan.

``The hardest thing in all of these is not just seeing the issue but taking action,'' Dougan, 48, told business leaders in Zurich on Feb. 5. ``It's always very difficult to say no.''

Derivatives Experience

When Dougan joined Credit Suisse in Tokyo in 1990 he helped set up a derivatives unit under Allen Wheat. Derivatives are financial contracts whose value is derived from debt or equity securities, currencies and commodities. Three years later, he became co-head of bond underwriting and origination in New York, before turning around the flagging equities unit, generating pretax profit of $1 billion before bonuses by 2000.

Credit Suisse's net third-quarter debt writedowns amounted to 2.2 billion francs. The bank, which reported a profit on subprime, said in November it had ``de minimis'' holdings left.

By contrast, UBS still held $29 billion of subprime-linked assets at the end of November. Rohner, 43, and Chairman Marcel Ospel told investors in December the positions were created ``by a small group of people in one team.''

To be sure, Credit Suisse may be holding about $7.4 billion of commercial mortgage-backed securities, said JPMorgan Chase & Co. analyst Kian Abouhossein. He estimated the bank may need to mark down about $700 million on the bonds in the fourth quarter.

Private-Banking Laggard

Credit Suisse's investment bank may be more resilient as demand for trading and financing slows. It spent 68 cents of every dollar of revenue in the first half of 2007, compared with UBS's 71 percent cost-to-income ratio. Rohner has cut 1,500 jobs at UBS's securities division since taking over direct control in October. Dougan, who ran the unit at Credit Suisse for three years, is cutting about 500 jobs.

``UBS's investment bank is suffering a broader loss of revenue momentum against a backdrop of greatly increased headcount and management departures,'' Citigroup analysts Jeremy Sigee and Kiri Vijayarajah wrote to clients on Feb. 4.

Credit Suisse is still behind in managing money for wealthy clients, attracting 38.2 billion francs in net new money in the first nine months, compared with UBS's 120.2 billion francs. The company plans to hire 1,000 more advisers through 2010 and is investing in the U.S., Singapore and Hong Kong.

``Credit Suisse has already pushed ahead of its large rival in terms of investment banking,'' Bear Stearns analyst Christopher Wheeler said. ``They should be kicking ahead'' in private banking, too, he said.

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Swiss banking giants risk client flight over subprime: analysts
AFP
By Andre Lehmann AFP - Monday, February 11 12:21 am

ZURICH (AFP) - Swiss banking titans UBS and Credit Suisse risk losing clients to smaller rivals as annual results next week reveal the heavy impact of the US subprime crisis on their balance sheets.

UBS already said last month it expects its first ever full year net loss due to its subprime exposure, closing 2007 some 4.4 billion Swiss francs (3.5 billion dollars, 2.75 billion euros) in the red.

Subprime losses amount to about 12 billion dollars, with the loss of a further 2.0 billion dollars attributable to other aspects of the US housing market, the bank said.

The US economy has been hit by a downturn in the property market that has exposed banks to billions of dollars of losses and caused a general tightening of credit to businesses and consumers, with knock-on effects felt all around the globe.

UBS "has lost the confidence of its clients," said a Zurich-based trader who expects a downturn in the bank's key asset management business.

Funds research agency Lipper said that UBS has seen an 8.4 percent decline in its assets under management in the past six months, while Credit Suisse has seen a 1.9 percent fall.

At the same time, medium-sized Swiss banks such as Pictet and Julius Baer have seen their assets under management rise 11.9 percent and 12.3 percent respectively over the same period.

Julius Baer said on Friday that some of this rise came from "a certain number of new clients," without providing further details.

UBS publishes its full results on Thursday, but already has the unenviable status of the third-biggest loser from the subprime crisis, after Citigroup (21.1 billion dollars in losses) and Merrill Lynch (19.4 billion dollars).

The bank warned in January that 2008 would be a difficult year owing to the fallout from the subprime crisis and turmoil on global financial markets.

"We cannot, at this time, accurately predict the future development of US residential mortgage markets and therefore the ultimate impact on our positions in subprime mortgage-related securities," UBS said in a letter to shareholders.

Rival Credit Suisse, which unveils its own full year figures on Tuesday, is expected to fare somewhat better after not getting its fingers so badly burned by subprime, analysts said.

The bank is expected to post a full year profit between 8.6 and 9.4 billion Swiss francs, down from 11.3 billion Swiss francs in 2006.

"Credit Suisse got out of subprime in time, before the market crashed," said Zuercher Kantonalbank analyst Andreas Venditti.

However the bank is still exposed to other sectors, such as commercial mortgage backed securities (CMBS) and leveraged buy-outs, which could yet fall victim to the credit crunch, he added.

"Problems could arise for the 53 billion dollars worth of LBO-backed securities, and CMBS," where Credit Suisse has not revealed its exposure, said Landsbanki-Kepler analyst Dirk Becker in a note to clients.

Analysts said both big banks are likely to take further hits from the financial crisis as the year progresses.

For UBS, "the figures being talked of are around 8-10 billion Swiss francs," a Zurich trader said.

ZKB expects Credit Suisse meanwhile to announce writedowns of between 0.5-1 billion Swiss francs.

In December, UBS sought to calm troubled waters by seeking fresh capital from Singapore's state investment arm (GIC) and an unnamed Middle Eastern investor.

GIC said it would inject 11 billion Swiss francs into UBS, giving it a stake of around nine percent and thus making it the largest single shareholder, while the Middle Eastern investor was to put up two billion Swiss francs.

However the plan has sparked widespread opposition from smaller shareholders who fear a loss of influence, and who are set to vote against it at a stormy annual general meeting on February 27.

The AGM "will be a long and difficult one for the management," said Credit Suisse banking analyst Christine Schmid.