UBS warns of difficult year ahead as sub-prime woes put it in the red

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The Swiss investment banking giant UBS faces further pain after reporting the first year of losses since its landmark merger a decade ago, admitting that 2008 would be "another difficult year".

UBS shares plunged 8.3 per cent yesterday following downbeat comments from its chief executive, Marcel Rohner, over the group's prospects for the year.

A source close to UBS, whose profits were smashed in 2007 by its exposure to the US sub-prime mortgage market, said the start to 2008 had already proved volatile.

The Swiss bank announced its fourth quarter and full-year results in Zurich yesterday, although the heavy losses came as no surprise after they were flagged at the end of January. The group posted a Sfr12.45bn (£5.75bn) loss in the fourth quarter, during which time it was forced to write down Sfr15.6bn. The group said its poor performance "was entirely due to very weak trading results in its fixed income, currencies and commodities area".

The writedowns were principally caused by the bank's exposure to subprime, which came in at Sfr12.3bn. It was down a further Sfr2.3bn because of its Alt-A mortgage business – US mortgages that are slightly less risky than subprime – and Sfr993m on credit protection from monoline insurers.

The poor performance during the final quarter contributed to full-year net losses of Sfr4.38bn, spiralling from a profit of Sfr12.25bn in 2006. It was the first time the group had suffered full-year losses since it was formed 10 years ago from the merger between the Union Bank of Switzerland and the Swiss Bank Corporation, the first and third largest banks in the country.

The ratings agency Moody's Investor Service reaffirmed its B+ rating in the wake of the announcement, adding: "The outlook on these ratings remains negative."

Mr Rohner called 2007 one of the "most difficult in our history". He said: "The sudden and serious deterioration in the US housing market, in combination with our large exposure in sub-prime mortgage-related securities and derivatives, has driven us into a loss for the year."

The bank still has a heavy interest in sub-prime assets. At the end of December, it had $27.6bn-worth (£14bn) of exposure to US residential sub-prime mortgages, although that is down from $38.8bn on 28 September.

It also revealed for the first time yesterday that its net exposure to Alt-A was $26.6bn. Last year, UBS set up a group of dedicated traders solely concentrating on managing the exposure to these mortgages.

Elsewhere in the results, its global asset management division disappointed as profits fell almost 6 per cent to Sfr1.39bn, caused by the closure of Dillon Read Capital Management. A spokesman for UBS said that without the one-off loss the division would have reported record results, up 22 per cent from 2006 to Sfr1.69bn.

While the numbers were overshadowed by the spectre of sub-prime, there were reasons for cheer across the group. While the fixed income, currencies and commodities division revenues suffered heavily, its investment banking and equities departments enjoyed record results. Also strong was its global wealth management and business banking.