UBS has taken its total write-downs from the credit crunch to $37bn (£18.7bn) and announced a SFr15bn (£7.5bn) rights issue in an attempt to draw a line under its disastrous excursion into structured credit.
UBS unveiled a $19bn write-down on US real estate and structured credit products, more than doubling the charge it took last year and making it the worst-hit bank from the global credit crisis. The Swiss bank said it would post a net loss of SFr12bn for the first quarter, putting it on course for its second straight annual loss.
The news claimed the head of Marcel Ospel, UBS's chairman, who had been under mounting pressure as writedowns from the bank's excursion into investment banking mounted. UBS said it had gone to shareholders to shore up its capital position to protect its core wealth management franchise. The business suffered outflows in Switzerland at the start of this year because of "reputational" damage from the bank's continued exposure to the credit crunch, said Marcel Rohner, UBS's chief executive.
"UBS is aiming to put a line below its risk exposure problem and refocus on operational businesses," said JPMorgan in a note to clients.
UBS also said it would create a unit to ring-fence its toxic assets. The unit will be a separate company and could be sold or spun off, the bank said. Mr Rohner said the move would help to reduce the distraction of the assets for its main businesses.
Mr Rohner declined to predict the writedowns were the final charges UBS would have to take this year. He said cuts were on the way at its investment bank, which has already cut 1,500 jobs since October. He also declined to say when UBS would be in a position to start accruing dividends again.
The rights issue follows a SFr13bn capital raising announced in December from sovereign wealth funds in Singapore and the Middle East. The second capital injection will prevent the tier one capital ratio – essential for client confidence in wealth management – from taking a fatal hit from the writedowns. UBS said its tier one ratio would be about 10.6 per cent.
Mr Rohner said: "We believe this capital increase and the creation of a vehicle to separate problem assets from the remainder of our businesses will allow us to return to sustainable value creation over time."
Switzerland's biggest bank was joined by Deutsche Bank, Germany's largest lender, in getting bad news out, announcing a €2.5bn (£2bn) writedown for the first quarter. Though small in comparison to UBS's losses, Deutsche's charge was bigger than its writedown for 2007.
The news sent UBS shares soaring 12 per cent and boosted Deutsche's stock, along with shares of other European lenders, as investors bet that the "kitchen sink" markdowns could spell a turning point in the credit crisis. In the UK, shares of Royal Bank of Scotland rose 7 per cent while Barclays gained nearly 6 per cent.
The sector was also boosted by signs that Hank Paulson, the US Treasury Secretary, and central bankers are considering radical remedies for the chronic shortage of liquidity in the financial system.
But Mark Thomas, European banks analyst at Keefe, Bruyette & Woods, said the market relief was overdone and predicted further writedowns and management changes ahead for the banking sector. "There are still risks on the downside which outweigh the potential returns," he said.
UBS's announcement also helped US banking stocks to rally. American bank shares were boosted by strong demand for a $4bn convertible stock offering from Lehman Brothers, which has been dogged by concerns since the near-collapse of Bear Stearns last month. Lehman shares jumped 17.8 per cent. Citigroup and Merrill Lynch also enjoyed double-digit percentage gains as the Dow Jones gained 391.5, or 3.2 per cent, to 12,654.4.
The news from UBS also boosted the dollar by reminding investors that the credit crunch was a global problem. The US currency rose against the euro and the yen, helped also by a better-than expected report on US manufacturing activity for March.Reuse content