UBS predicts ‘another difficult year’

UBS predicts ‘another difficult year’

By Haig Simonian in Zurich

Published: February 14 2008 07:27 | Last updated: February 14 2008 18:25

UBS, the European bank hardest hit by the subprime crisis, offered a gloomy outlook on Thursday, raising questions about how it will handle its exposure to the US residential mortgage market.

Shares in the Swiss bank fell by 8.3 per cent to close at SFr37.46 as investors praised its greater candour but expressed concern about additional holdings of securities not previously revealed.

The bank’s subprime portfolio fell to $27.6bn on December 31 from $29bn on December 10, when UBS issued a profits warning. But the bank on Thursday unveiled a further $26.6bn exposure to higher-rated paper, a $3.8bn subprime-related reference-linked note programme and a $2.9bn link to monoline insurers. Separately, in commercial mortgage-backed securities, UBS held a combined $7.7bn position via its trading book and loans.

Matt Spick of Deutsche Bank said: “We still think further writedowns are likely in at least the first quarter . . . raising the risk of market share losses.”

The revelations came as the bank prepared investors for “another difficult year” after losses in fixed-income trading heavily outweighed earnings in private banking.

UBS reported a SFr4.38bn ($3.98bn) net loss for 2007, and a SFr12.45bn loss in the fourth quarter, when most writedowns were booked. By comparison, the bank made SFr12.26bn after tax in 2006, and SFr3.41bn in the last three months of that year.

Marcel Rohner, chief executive, blamed the troubles on a “me-too strategy in fixed-income, predicated on closing gaps with our competitors”, cheap liquidity from the group’s private banking franchise and the creation of Dillon Read Capital Management, its now closed internal hedge fund.

He stressed action had been taken to curb risk in fixed-income trading, the source of the group’s subprime problems. There had also been improvements in controls and a sharper focus on business for clients, rather than for the bank’s own book.

The balance sheet had been reduced by about SFr200bn, or 9 per cent, between the third and fourth quarters, and would be trimmed further.

Pre-tax losses at the investment bank amounted to SFr15.53bn against pre-tax profits of SFr5.94bn in 2006. Private banking prospered, with pre-tax earnings for global wealth management and business and retail banking in Switzerland climbing to SFr9.48bn from SFr8.14bn in 2006, while pre-tax profits in the fourth quarter hit a record SFr2.51bn.

Net new money inflows were SFr156bn last year, up 37 per cent on 2006. But the SFr31.7bn booked in the final quarter was only marginally up on the SFr30bn for October and November.

December is usually a weak month but the modest rise implied clients might have been reluctant to make new deposits.