UBS, Hit by Mortgage Risk, Sees Hard Year Ahead

Swiss bank UBS has revealed $26.6 billion in exposure to risky U.S. mortgages distinct from subprime loans, increasing its vulnerability to the global credit crisis and sending its shares sharply lower.

Shares in the bank, which declined to say if it would return to profit in early 2008, closed 8.3 percent lower.

"This will raise concerns about further major writedowns in 2008," said Bear Stearns analyst Chris Wheeler in a note.

UBS said on Thursday the newly unveiled exposure, announced together with full-year and fourth-quarter results, was to so-called Alt-A mortgages, which are of higher quality than subprime loans but also considered risky.

UBS has taken about $18 billion of dollars in write-downs on its exposure to U.S. subprime mortgages, which at the end of December amounted to a net $27.594 billion, making it one of the biggest casualties of the global credit crunch.

Chief Executive Marcel Rohner said he could not say if UBS would return to profit in the first quarter, after posting a fourth-quarter loss roughly in line with guidance it gave in a profit warning last month.

Analysts said UBS could report more losses in the first quarter on subprime exposure it has hived off into a special "workout portfolio" in order to sell the securities.

"There will be a separate workout book, and that will presumably be separately reported. I would imagine that would make a loss in the first quarter," said Derek Chambers at Standard & Poor's Equity Research.

The bank's shares have lost half their value since the middle of last year, when a credit crisis triggered by a meltdown in subprime mortgages started to gather pace.

UBS reported a net fourth-quarter loss of 12.451 billion Swiss franc ($11.3 billion) and said it lost 4.384 billion francs for the year, in line with analysts' forecasts.

UBS Chief Financial Officer Marco Suter also said Singapore and an unnamed Middle East investor, who agreed in December to provide a 13 billion Swiss franc capital injection, were still committed to a mandatory convertible note, contrary to rumors that Singapore was having second thoughts.

"This is a committed transaction," Suter told Reuters.

Suter said the bank could improve its capital ratios without having to raise additional equity by cutting risk-weighted assets or issuing hybrid debt instruments.

He also said liquidity was returning to structured credit markets, which have been snarled up by the global credit crisis.

Shareholders will be asked to approve the capital increase at an extraordinary shareholders' meeting on Feb. 27.

Writedown Breakdown

The bank gave a detailed breakdown of $13.4 billion of write-downs made in the fourth quarter, slightly below the $14.4 billion previously disclosed. UBS also wrote down $4 billion of subprime assets in the third quarter.

The bank took a $2 billion charge on its exposure to the Alt-A mortgages and a charge of $871 million on credit protection bought from monoline bond insurers.

Its Chief Financial Officer Marco Suter said it had net exposure of $3.6 billion to monoline bond insurers – which insure interest and capital payments on bonds and sell protection on collateralized debt vehicles -- businesses that have looked increasingly fragile as the credit crisis spreads.

It also took a $9.6 billion charge on subprime mortgages and a $1.2 billion write-down on subprime and Alt-A components of a securities program called a U.S. reference-linked note.

More than half the Alt-A write-down was against a higher risk category of the debt worth $5.4 billion at year-end.

The bank said its wealth management business had held up in the fourth quarter, with net new money inflows of 31.7 billion francs, above analysts' average forecast of 30 billion francs.

Some investors were unnerved that money inflows appeared to lose momentum towards the end of the year after UBS said in December that net new money in October and November alone had topped an estimated 30 billion francs.

"People are asking: is contagion going to spread to asset management?" said Derek Chambers.

Rohner told analysts that net new money inflows into its wealth management business was positive in January.

The world's largest wealth manager suffered fourth-quarter outflows of 16.2 billion francs from its global asset management business as institutional clients pulled their money out of equities, fixed-income and multi-asset products.

Some analysts had predicted that UBS's $18.4 billion of subprime write-downs would frighten away wealthy clients.

Rohner said the bank continued to reduce exposure in January, but declined to make a forecast for first-quarter results, saying market conditions were particularly challenging.