Belfast Telegraph

UBS warns of fragile market as it reports bigger loss than expected

By Sean Farrell

UBS warned yesterday that improving market conditions were fragile and that strain from the sub-prime crisis would not ease soon as it reported a bigger third-quarter loss than expected.

Switzerland's biggest bank announced a net loss for the third quarter of SFr830m (£350m), more than the SFr600m-800m it had predicted this month. The bank said strong performances at its wealth management and asset management businesses should result in a profit for the group in the fourth quarter but cautioned that the investment bank was unlikely to return to profit.

"UBS is not assuming that the quarter will continue as positively as it has begun, or that the current difficulties will be resolved in the short term," the bank said.

The bank's shares fell 1.3 per cent to SFr61.35. Analysts said UBS could be preparing the ground for further write-downs as markets remained volatile and assets were hard to price accurately.

Credit analysts at Dresdner Kleinwort said: "We expect management to further de-risk operations, but with sizeable US sub-prime-related exposures remaining, further write-downs could follow. The strong level of capitalisation offers a good buffer for this risk."

UBS has been Europe's main casualty of the credit crunch after expanding its fixed-income business into riskier areas of business. But the Swiss bank got its timing wrong when in June last year it launched Dillon Read Capital Management, a hedge fund that invested in mortgage-backed securities, just as defaults were increasing on home loans to risky US borrowers. As sub-prime losses mounted, the fund imploded in May and soon afterwards the bank's chief executive, Peter Wuffli, was out of a job.

Mr Wuffli was replaced in July by Marcel Rohner, who headed the core wealth management division. Mr Rohner acted quickly to oust the bank's finance dir-ector and the head of investment banking, saying UBS's balance sheet had been used too freely for risky business. He also announced 1,500 job losses in the investment bank's fixed-income division as he tried to draw a line under the expansion of the business under the previous regime.

A series of trading statements and third-quarter results by big banks in the US and Europe had calmed the market's nerves about the impact on banks of the credit crunch that was sparked by the US sub-prime crisis. But investors and analysts have become increasingly nervous in recent weeks after Merrill Lynch reported a massive increase in sub-prime write-downs over the estimate it had given a few weeks before.

Like Merrill Lynch, UBS expanded from its core business of looking after clients' wealth into riskier investment banking business with higher returns.

The investment bank had a pre-tax loss of SFr3.7bn compared with a SFr1.1bn profit a year earlier. The fixed-income division inflicted the damage on the investment bank, but UBS said the business had performed "extremely well" in equity underwriting and corporate advice.

All eyes will be on Deutsche Bank's third-quarter results today. The German bank gave investors an upbeat outlook at the start of the month, despite problems from the credit crunch. UBS's biggest Swiss rival, Credit Suisse, reports third-quarter figures the day after.

Belfast Telegraph