Banks' Writedowns Signal Continuing Weakness

The latest warning by UBS that it may face more writedowns, as well as last week's announcement by Merrill Lynch that it would have to write down $8.4 billion, show that the weakness in the financial sector is set to continue, analysts told CNBC Monday.

Investors have been bracing for more bad news from banks after Merrill Lynch's announcement, as it reflected a serious worsening of the conditions in the Collateralized Debt Obligations (CDOs) market.

AP

Besides the liquidity squeeze, the dollar's weakness plays a major part in the banks' losses as well, Kevin Sullivan, from Clariden Leu, told "Worldwide Exchange."

"I think they've been hit by the revaluation of these subprime CDOs that they can't actually price and also the fact that, as the dollar declines, their dollar earnings also decline," Sullivan said.

"So I would expect over time, over the next six months or maybe a little beyond, (the weakness) to continue," he added.

UBS

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[UBS  Loading...      ()   ] said it may face more writedowns on its fixed income portfolio but confirmed it would on Tuesday report a third-quarter pretax loss of 600 million-800 million Swiss francs ($515.9-$687.9 million).

Warning of More Bad News

Reacting to a weekend newspaper report saying more hefty writedowns would force it into a much bigger quarterly loss than first announced, UBS also said on Monday the fourth quarter had started well in all business areas, including its investment bank.

But the bank said it was not assuming the fourth quarter would continue as well as it had begun and it added that it could face further writedowns on its fixed income portfolio.

Analysts said they were inclined to interpret the statement, issued only one day before the formal announcement by UBS of its results, as a warning of more bad news to come.

"They have not squashed it (the rumors of more writedowns), they have confirmed it," said one London-based analyst, who asked not to be identified.

UBS, the world's largest wealth manager, is due to report third-quarter results at 5 am London time on Tuesday, Oct. 30.

The UBS statement referred to a media report over the weekend which suggested that it may face additional writedowns in trading positions related to the U.S. subprime residential mortgage-backed securities market.

UBS said the fixed income business "remains exposed to further deterioration in the U.S. housing and mortgage markets as well as ratings downgrades for mortgage-related securities."

UBS said on Oct. 1 that it would take a 4 billion franc charge to write down losses on its fixed income portfolio and forecast that it would make a third-quarter loss of 600 million-800 million francs.

UBS has had a turbulent year, announcing the closure in May of a hedge fund venture, Dillon Read Captial Management, after it ran up big losses linked to the deterioration in the U.S. subprime mortgage market.

The Swiss bank's CEO, Peter Wuffli, resigned abruptly in July and was replaced by Marcel Rohner, who now faces the task of repairing UBS's tarnished reputation.