UBS Shares Sink on Writedown Fears


Swiss bank UBS came under renewed pressure on Thursday due to speculation it had sold a huge portfolio of risky mortgages at a deep discount and that the scale of its subprime losses was rapidly mounting.

Analysts said they believed UBS had sold its Alt-A investments -- U.S. mortgages ranked between prime and subprime -- to bond manager Pimco for 70 cents to the dollar, taking a deep discount on a 26.6 billion Swiss franc ($25.7 billion) portfolio.

Analysts also see the ailing bank making further writedowns on a massive 400 billion franc portfolio of repurchase agreements as it rushes to cut its exposure to the capital markets in general and to risky assets in particular.

While selling the Alt-A assets would free UBS of some of the uncertainty that has dogged its share price, the cost could be heavy, entailing additional losses. By contrast, any writedown on its repo portfolio may raise fears of more losses to come.

"Managing down a 2.3 trillion Swiss franc mortgage-heavy balance sheet in a turning credit cycle will be costly and risky and could overhang the earnings power of business," Morgan Stanley said in a note to clients.

UBS, the European bank hit hardest by the credit crisis, has said it is well positioned to withstand further losses after raising 19 billion francs in emergency capital. Analysts largely agree that the bank could take more big hits without needing more emergency cash from shareholders or new investors.

But fears that the bank has become a hostage to fortune -- unable to offload about $90 billion in risky investments and subject to the whims of the U.S. real estate sector -- continue to weigh on its shares.

"UBS may choose to sell down its workout book of mortgages, taking larger upfront losses to reduce uncertainty on capital ratios," Morgan Stanley said.

UBS declined to comment.

New Lows

UBS shares fell over 4 percent to a new five-year low before recovering slightly to trade down 1.55 percent at 31.74 francs, compared with a 1 percent fall in the DJ Stoxx European bank index. UBS shares have shed 42 percent in the past three months alone -- far more than any other major European bank.

Meanwhile, many analysts have increased their estimates of how much UBS stands to lose to the U.S. credit crisis.

Analysts at J.P. Morgan said they now expected UBS to write down 18.5 billion francs in total assets in the first quarter, compared with their previous estimate for 15 billion in writedowns, as a result of the Alt-A sale.

Merrill Lynch analysts said potential further writedowns at UBS could total $21 billion.

Analysts at Morgan Stanley said they had raised their worst-case potential loss estimates for UBS to $15-25 billion from previous estimates of $10-15 billion as a result of any Alt-A sale and repo repricing.

Analysts at bank Exane BNP Paribas said the Alt-A sale, if confirmed, would weigh on shares, as would reputational damage to the franchise.

"Worries on the eventual damage stemming from the bank's fall from the once-world-class wealth management franchise as well as uncertainty on the actual value of the toxic securities will inevitably continue to weigh on the stock price," Exane BNP Paribas said in a note to clients.

Speculation is rising that the group may seek a radical restructuring that could include the sale of its U.S. wealth management activities or the separate bourse listing of its flagship international private bank.

UBS shares closed 4.7 percent lower.