UBS to write down but has massive Tier 1 capital

UBS has announced that it expects further massive hits from the credit crisis and subprime meltdown to affect its quarterly earnings to be released soon. However, after raising a huge amount of equity capital, the company is well-capitalised enough to weather the storm. They ned not raise further capital as their Tier 1 capital, at over 11%, is well above levels needed to be considered well-capitalised.

Although their announcement was greeted with mixed results in the market, I consider this to be a net positive for UBS and the banking system as a whole. Their losses were largely expected but their capital position puts them in a strong position.

Thank god for rights issues.

UBS AG may avoid a loss in the second quarter and has no plans raise capital after 3 billion Swiss francs ($2.9 billion) in tax credits offset damage from the subprime crisis.

UBS, the European bank hardest hit by the subprime contagion, said today its results were “at or slightly below break-even” in the quarter. Citigroup Inc. analysts estimated this week UBS would post a loss of 4.56 billion francs in the period on about 7 billion francs in asset writedowns.

Chief Executive Officer Marcel Rohner, who has announced plans to cut 5,500 jobs and shrink the investment bank, is also trying to stem defections among wealthy clients after 25.4 billion francs of net losses. UBS said its money management division suffered client defections in the second quarter, with the withdrawals most pronounced in April.

“UBS clearly wanted to show that it didn’t do that bad,” said Florian Esterer, a senior portfolio manager at Swisscanto Asset Management, which oversees about $63 billion. “What worries me are the net new money outflows, which indicate a serious problem for the franchise.”

UBS fell 54 centimes, or 2.6 percent, to 20.48 francs in Swiss trading, after initially climbing as much as 8.2 percent. The Bloomberg Europe Banks and Financial Services Index fell 3.1 percent. UBS is down 56 percent this year.

Rating Cut

The Swiss bank sees no need for further capital because its Tier 1 ratio, a measure of solvency, stood at about 11.5 percent at the end of June, up from 6.9 percent on March 31. UBS raised 16 billion francs in a rights offer in the second quarter, after turning to investors for 13 billion francs earlier this year.

Goldman Sachs Group Inc. analysts estimated today that European banks may have to raise as much as 90 billion euros ($141 billion) as slowing economies drive up losses on loans.

Moody’s Investors Service cut its rating on UBS senior debt by one level to Aa2, citing “challenges still facing the bank’s management team to return UBS to a position of stability,” and expectations of weaker client fund inflows.

Banks worldwide have announced $402 billion in writedowns and credit losses related to the subprime crisis, data compiled by Bloomberg show. Markdowns at UBS amounted to more than $38 billion in the previous three quarters. UBS is scheduled to publish second-quarter results on Aug. 12.

UBS, which earned a profit of 5.55 billion francs in the second-quarter of 2007, said market turmoil led to writedowns and a loss at the investment bank in the past three months.

Bloomberg News, 4 Jul 2008

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