Jeremy Warner's Outlook: Now UBS goes cap in hand to wealth funds</B>

Lloyds TSB: every dog has its day; Vod suffers from Indian rope trick
Click to follow
The Independent Online

Citigroup was forced to turn to Abu Dhabi to bolster its capital position. Now UBS has had to go cap in hand to the sovereign wealth funds of Singapore and Oman to shore up the balance sheet. It is surely only a matter of time before some once-proud American or European bank turns to the Chinese for assistance.

As Western bankers sink amid a sea of sub-prime lending write-offs, the need to turn to Asia and the Middle East for new capital seems both desperate and powerfully symbolic of the shifting power equation from developed to developing world.

Even a few years back, no Western banker in his right mind would willingly invite such investors on to the share register. It would have seemed somehow disreputable to have done so. Yet there is nothing like necessity to humble misplaced pride.

In today's world, the "haves" and the "have nots" are being bizarrely reversed, with the prosperous West never more dependent on the vast capital surpluses of Asia and the Middle East to keep the wheels of economic progress turning. Where once Western bankers would sniffily have shown the sovereign wealth funds of the developing world the door except as fee-paying clients, of course today they are only too pleased to welcome them in.

With UBS, the dilemma would have been a double excruciating one. Swiss bankers are valued for their discretion and their innate conservatism. The losses sustained by UBS on collateralised debt obligations (CDOs) have dealt a devastating blow to the bank's reputation for the latter. Little more than two months after expressing confidence about full-year profits, UBS has been forced to admit to another $10bn of write-offs, wiping out fourth-quarter profits and likely pushing the bank into losses for the year as a whole.

The often secretive super-rich use Swiss bankers because they are, well, Swiss. They don't expect to wake up one morning and read that the custodians of their money have been forced to shore up the balance sheet with Asian and Middle Eastern dollars. Whatever happened to all that Nazi gold, the orphaned billions which by repute at least sustained the health of the Swiss banking system? Sunk in American trailer parks seems to be about the sum of it.

Yet the alternative to seeking these new sources of capital would have been much worse. Following the capital increase, UBS will have tier-1 capital of 12 per cent, which is 2 percentage points above its target ratio and quite a lot more than it really needs. Failure to take such action would on the other hand have exposed the group's private banking franchise to the possibility of mass withdrawals. As it is, UBS will struggle to maintain healthy levels of inflow. Swiss banking, it appears, is not quite as safe as wealthy depositors once assumed.

Existing shareholders meanwhile suffer an 18 per cent dilution, and, as evidence of quite how desperate UBS must have been, it has to pay a 9 per cent coupon on the great bulk of the new money until conversion of the loan stock into equity. This is admittedly less than the 11 per cent Citigroup was forced to pay, but it is still a deeply humiliating rate for a bank of such once-rock-solid standing.

Some of the necessary management cull at UBS has already largely occurred. The responsible chief executive, Peter Wuffli, is history, and, though the chairman, Marcel Ospel, continues for the time being to cling stubbornly to the wreckage, we can only assume that he too will shortly be on his way.

What's more, by writing off as much as $10bn, UBS claims to have taken the extreme view of the value of these securities that is reflected in current market prices.

It seems likely that ultimately they will be worth rather more. Marcel Rohner, the new chief executive, says that by being so pessimistic he hopes to create "maximum clarity" on the issue of sub-prime losses and thereby substantially eliminate speculation as to whether they were being adequately reflected in write-downs.

He'll just have to pray he is right. Mr Rohner used to be in charge of private banking and was therefore not directly responsible for the calamity which has befallen UBS. Yet he is still part of the old guard, and he too would be vulnerable if the latest clearing of the decks again proved insufficient.

Once upon a time, Swiss bankers were renowned for their privacy and competence. Then they discovered the delights of Wall Street investment banking, collateralised debt obligations and all those other weird and wonderful inventions of the global credit markets. They should have stuck to cuckoo clocks.

Lloyds TSB: every dog has its day

Not that British banks have much to be proud of on this front either. Yet outside Northern Rock, none of them has so far had to raise fresh equity capital. Is it only a matter of time, or can the major British banks hope to weather the storm without having to resort to Asia and the Middle East for new capital?

Trading updates announced so far suggest the latter, though with the credit crunch raging on it is still too early to provide definitive answers. There was fresh evidence of continued problems yesterday with SocGen forced to bring $4.3bn of structured investment vehicle assets on to its balance sheet to avoid a fire sale of assets, and the announced bailout of one of the big credit insurers known as "monolines".

Even so, they have all so far strongly refuted the idea that they might need more capital. The latest to do so is Lloyds TSB, whose 200m of sub-prime write-offs looks positively trivial alongside others.

All of a sudden, Lloyds TSB finds itself cast in the role of solid and reliable, in sharp contrast to the barbs that used to be thrown at it only a few years back. Then Lloyds TSB was routinely portrayed as a bank with nowhere to go, having deliberately avoided the allure of investment banking and overseas acquisition-making.

Today Lloyds' steady-as-she-goes concentration on UK retail banking, conservatively financed largely from retail deposits, seems a positive advantage as well as a business model that other bankers might want to replicate. As a consequence, the share price has suffered less severely than rivals. The dividend also looks safe.

Eric Daniels, the chief executive, is left to reflect on the fact that, if you wait long enough, every dog has its day, even if the secret of his success seems largely to be down to the impotence imposed on him by the City. Or perhaps it was deliberate. Whatever the answer, it seems to have saved Lloyds TSB from the wilder excesses of the credit boom.

Vod suffers from Indian rope trick

The Indian government risks sending out the wrong signals to international business by arbitrarily deciding to allocate scarce new GSM spectrum to rival CDMA operators rather than GSM incumbents such as Vodafone Essar.

No doubt some sort of a case can be made for more competition in the fast-growing Indian mobile phone market, yet the spectrum was originally promised to existing GSM operators under the terms of licences bought at huge cost.

The challenges facing business in India are many and varied, but one of the biggest is the constantly shifting sands of public policy, both at national and regional level.

By favouring one set of commercial interests over another, this frequently verges on the overtly corrupt. India will never achieve its full potential as a development story while government remains so unpredictable and capricious. Mobile telephony has been a huge Indian success story in recent years which Vodafone through the purchase of Hutchison Essar is now sharing in. But it cannot remain so if the rules are chopped and changed inexplicably to give one business dynasty advantage over another.

j.warner@independent.co.uk

Comments