UBS Swings to Loss, Facing Subprime Problems


UBS reported its first quarterly loss in five years after hefty writedowns on subprime-related investments, but said it expects to turn in a group profit in the last quarter.

Oliver P. Quillia for

The Swiss bank, which took charges of 4.2 billion Swiss francs ($3.6 billion) on subprime-related losses in fixed income in the third quarter, said on Tuesday its investment bank was unlikely to break even in the final quarter.

UBS is the second global bank to report a third quarter loss after U.S. investment bank Merrill Lynch last week unveiled $8.4 billion in writedowns, forcing it into the red.

Although UBS's wealth management results were "very strong", investment banking contributed to the negative overall results, Javier Lodeiro, banking analyst at Sal. Oppenheim, told "Power Lunch Europe."

"The new outlook for the fourth quarter, that's actually the negative news," Lodeiro said. "Further writedowns have not been in my mind and that's quite a surprise."

He said he did not take into account for the moment the possibility of writedowns beyond the fourth quarter, but it all depended on the U.S. housing market.

"If the markets don't stabilize a little bit, then we will see further ones," Lodeiro added.

Ill-Fated Hedge Fund

The Swiss bank's subprime woes stem from an ill-fated hedge fund venture, Dillon Read Capital Management, which it was forced to close earlier this year after it ran up big losses.

Credit Suisse and Deutsche Bank which also have big investment banking units, unveil third quarter profits later this week but appear to have been largely spared the subprime problems that have afflicted UBS.

Banks worldwide have taken charges totalling more than $20 billion on holdings in mortgage-backed securities which have been hit by a meltdown in U.S. subprime mortgages -- loans extended to borrowers with patchy credit histories.

UBS repeated warnings of further writedowns, but Chief Executive Officer Marcel Rohner declined to give a forecast.

"The range of possible outcomes is widening," he said. "While we are still disappointed with the result, we have a very strong set of numbers in particular in asset-gathering and the commission-based businesses," Rohner told journalists on a conference call.

UBS's Chief Financial Officer Marco Suter later told Reuters that any writedowns UBS may have to make on subprime-related exposures in the fourth quarter were "highly unlikely" to be on the same scale as in the third quarter.

"Dillon Read seem responsible for a lot of these problems," said David Williams at Fox, Pitt-Kelton. "Deutsche were probably more controlled and Credit Suisse say they have no big writedowns."

Higher Loss than Expected

It was UBS's first significant loss in a three-month period since 1998, when the economic crisis in Russia hit results.

UBS made a 726 million franc pretax loss in the third quarter, after a 2.199 billion francs net profit a year ago.

The third-quarter net loss was 830 million francs, higher than a Reuters poll of 14 analysts giving an average forecast of a 668 million franc loss.

"Our third quarter result was unquestionably disappointing. However, we have introduced a number of measures to improve performance," Rohner said in a statement. "We are also taking steps to strengthen our market risk management."

Shares in UBS were 1.6 percent lower at 1358 GMT at 61.15 francs, having touched 60.95 francs earlier.

UBS Confirms Subprime Problems

UBS has had a turbulent year following the closure of Dillon Read Capital Management in May. The Swiss bank's CEO, Peter Wuffli, resigned abruptly in July and was replaced by Rohner, who has the task of repairing UBS's battered reputation.

Good Fourth Quarter Start

Huw Jenkins, who headed the investment bank, and former CFO Clive Standish left at the end of September. Rohner has taken charge of investment banking and Suter took over from Standish.

Presentation slides showed that UBS's exposure to residential mortgage-backed securities had fallen since the start of October to $16.8 billion from $19.0 billion while retained collateralised debt obligation (CDO) exposures fell to $1.8 billion from $4.0 billion.

The bank also disclosed it was holding highly illiquid "super senior" debt of $20.2 billion on Oct. 30.

The fourth quarter had started profitably for all businesses, including the investment bank, Rohner said.

"However the FICC (fixed income, currencies and commodities) business remains exposed to further deterioration in the US housing and mortgage markets," a UBS statement said.

Ratings downgrades by credit ratings agencies for mortgage-related securities could trigger more writedowns on the bank's securities portfolio, it said.

Net new money in wealth management was 40.2 billion francs in the third quarter, up from 26.8 billion francs in the third quarter of 2006.

-- contributed to this report