UBS and Citi write off billions on credit crisis

UBS and Citigroup published dire third-quarter results yesterday as write-downs caused by the credit crunch hit their earnings badly. But the banks' shares rallied as investors bet that the worst was over for the markets.

UBS, Switzerland's biggest bank, took the market by surprise by predicting a loss for the third quarter of up to SFr800m (£335m). The bank ousted the head of its investment bank as Marcel Rohner, the chief executive, took personal control of the business that was responsible for the losses.

Citigroup, the biggest US lender, said profit for the third quarter would fall by about 60 per cent as it wrote down the value of mortgage-backed securities and loans for leveraged buyouts.

UBS was an early casualty of the credit crunch when its Dillon Read Capital Management hedge fund imploded in May as losses mounted on securities linked to US sub-prime mortgages. The bank had opened the fund less than a year earlier, chasing high yields just as concern about defaults on the underlying mortgages started to mount.

Huw Jenkins, head of UBS's investment bank, has stepped down, and Mr Rohner will manage the business. UBS's finance director, Clive Standish, will leave and be replaced by the bank's vice-chairman, Marco Suter. UBS will cut 1,500 jobs at the investment bank before the end of the year. The bank declined to say where the cuts would take place.

The Swiss bank's downbeat trading statement in August had meant it was closely watched by invest-ors trying to gauge the extent of the damage done by the seizing up of the credit markets that had fuelled banks' profits for the past few years.

UBS shares fell heavily in early trading but recovered to close up as investors started to look to the future in the belief that the worst was over. Citigroup shares were were among the big-gest gainers yesterday in New York, up 2.3 per cent.

Citigroup said it lost about $1.3bn (£640m) in the third quarter on the value of sub-prime mortgage-backed securities that it had "warehoused" to be turned into collateralised debt obligations (CDOs). These opaque pools of assets caused unexpected losses for investors, and the market for them has dried up. The bank's biggest write-down was $1.4bn of leveraged finance loans.

"We expect to return to a normal earnings environment in the fourth quarter," Chuck Prince, Citigroup's chairman and chief executive, said. Mr Prince said Citigroup had also been damaged by investments in private equity, which it continued to make throughout the spring and early summer, despite warnings that risks were rising and returns could fall.