UBS warns the credit crisis pain is not over

The Swiss bank was forced to write down $5.6 billion (£2.7 billion) of subprime and other related loans in the last three months, resulting in a massive swing for the quarter from pre-tax profits of Swfr2.81 billion (£1.17 billion) to losses of Swfr726 million.

The investment banking arm, which employs hundreds of people in London and New York, saw a Swfr4.2 billion loss in its fixed-interest arm, which bore the brunt of the credit crisis.

That led to the ousting at the start of this month of investment banking chief Huw Jenkins and the decision to cull 1500 jobs, including at least 350 senior investment bankers worldwide.

Marcel Rohner, who took over as chief executive of the bank from Peter Wuffli in July as the problems began to mount, warned that the crisis may not be over.

Although he expects an overall return to profit by the bank in the fourth quarter he cautioned: "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.

"To be specific, we believe it is unlikely that the investment bank will contribute positively to UBS results for the last three months of the year.

"The fixed-interest, currencies and commodities business remains exposed to further deterioration in the US housing and mortgage markets as well as rating downgrades for mortgage-related securities, which could lead to further writedowns on the positions."

Rohner spelled out in detail the huge exposure UBS still has to securities related to the devastated US subprime mortgage market.

At the end of September its total holdings of subprime residential mortgagebacked securities were $16.8 billion. Its exposure to collateralised debt obligations was $1.8 billion. So-called super seniors, which rank above other tranches of CDOs, amounted to $20.2 billion.

"Our third-quarter result was unquestionably disappointing," admitted Rohner. "However, we have introduced a number of measures to improve performance.

"With the new management team, we are implementing changes to address the weaknesses that led to the losses. These include the management, structure and size of our balance sheet. We are also taking steps to strengthen our market-risk management and control framework." The third-quarter loss was worse than most analysts had forecast despite UBS warning them a month ago that the loss would be between Swfr600 million and Swfr800 million.

On average, analysts had predicted net losses of Swfr709 million but the actual after-tax loss was Swfr830 million.

UBS is the latest in the stream of banks being infected around the world by the US subprime mortgage crisis:

BRITAIN:
Feb. 8, 2007 - HSBC of BRITAIN blames soured U.S. subprime loans for its first-ever profit warning. In September, it announced the closure of its U.S. subprime unit, Decision One Mortgage, and recorded an impairment charge of about $880 million.

US:
April U.S. subprime lender New Century Financial Corp. files for Chapter 11 bankruptcy protection in the biggest collapse of a mortgage lender in the U.S. housing downturn.

July - Two banks in GERMANY, IKB and state bank SachsenLB suffer massive losses by investing in the U.S. subprime mortgage market. While the German banking industry bails out IKB, SachsenLB almost goes under due to the crisis and is quickly sold to state-backed Landesbank Baden-Wuerttemberg.

Aug. FRANCE BNP Paribas bars investors from redeeming cash in $2.2 billion worth of funds, telling the markets it is unable to calculate the value of the three funds due to turmoil in the subprime market.

Aug. 9 - HOLLAND: Dutch merchant bank NIBC discloses 137 million euros ($188.6 million) of losses on U.S. asset-backed securities in the first half, and shelves plans for an initial public offering indefinitely.

Sept. 13 - UK: Northern Rock experiences a bank run due to its exposure to the U.S. subprime crisis. The Bank of England steps in to rescue it.

Oct. 1 - SWITZERLAND: Credit Suisse says its results will be "adversely impacted" by the market turmoil but it will remain profitable in the third quarter of 2007.

Oct. 15 - US: Citigroup, the largest U.S. bank by market value, says its third-quarter profit fell 57 percent due to losses, with net income down to $2.38 billion from $5.51 billion a year earlier.

Oct. 19 - US Wacovia, the fourth-largest U.S. bank, posts a 10 percent decline in third-quarter profit, to $1.69 billion from $1.88 billion a year earlier, having suffered $1.3 billion of write-downs resulting from credit market turmoil.

Oct. 24 - US stuns Wall Street reporting the biggest quarterly loss in its history after writing down $8.4 billion, mostly from bad investments related to risky subprime mortgages.

Oct. 26 - US Mortgage lender Countrywide Financial Corp posts a $1.2 billion third-quarter loss after writing down $1 billion in subprime-lending losses.

Oct. 29 - JAPAN Mitsubishi UFJ Financial, Japan's largest bank, says it would write down the value of subprime-related investments by as much as 30 billion yen ($260 million) -- six times more than previously announced.

Oct. 30 - SWITZERLAND - Swiss bank UBS reports a third-quarter pre-tax loss of 726 million Swiss francs ($624.8 million) after it took a charge of 4.2 billion francs on subprime-related losses in its fixed income investments.