UBS in capital hike after huge loss

UBS AG doubled its writedowns from the subprime crisis, parted company with its chairperson and asked shareholders for more emergency capital on Tuesday in a second dramatic attempt to reverse its fortunes.

The Swiss bank wrote down an additional $19-billion on United States real estate and related assets, causing a net loss of 12-billion Swiss francs ($12,03-billion) in the first quarter, and said it would seek 15-billion francs through a rights issue of shares.

It is also hiving off ailing portions of the bank into a separate unit. The moves were more dramatic than expected by many, deal a new blow to the world’s largest wealth manager and make it the bank hardest hit by the credit crisis.

But shares in the bank rallied as traders who had bet on even worse news struggled to cover their positions and as investors hoped the moves would put the bank back on track.

“It’s a kitchen-sink job. They’ve separated all their toxic waste.
If they’re going to finance that then everyone is saying this is the beginning of the end, this is the last capital increase,” said a London-based trader.

UBS shares were up 6% to 30,52 francs at 7.26am GMT.

The crisis claimed the head of the bank’s chairperson, Marcel Ospel, widely criticised for letting Switzerland’s flagship bank sail blithely into dangerous waters in an ambitious bid to become the world’s biggest investment bank.

Ospel said he decided to leave the job after the bank was forced to go to shareholders for a second time in as many months for emergency capital. The group’s lawyer, Peter Kurer, was proposed as his replacement.

More job cuts in the group’s investment bank—source of the losses, in sharp contrast the group’s wealth management division—were on the way, UBS chief executive Marcel Rohner said in a conference call with journalists.

“Clearly the industry is in a very difficult environment and we have to review the capacity with which we operate in this environment,” he said.

Deutsche Bank AG also signalled the depth of the industry’s woes on Tuesday, reporting a surprise €2,5-billion in writedowns, saying market conditions had deteriorated dramatically in recent weeks.

Workout

UBS said it would create a new division to deal with the ailing assets after its mortgage-related positions deteriorated further in the quarter, in a clear move to draw a line under the crisis which has shaken investor confidence in the Swiss bank.

While the group was able to reduce some of its exposure to ailing debt, other potential risks increased and its overall position in US mortgages had deteriorated further, UBS said.

“The question remains whether finally all the skeletons have been cleared from the closet through today’s writedowns or whether there will be further problems.

There is still room for more correction given the exposure,” said analysts at bank Wegelin in a note to clients.

The writedowns come at the upper end of expectations and on top of $18,4-billion in damage caused by the subprime crisis last year, which had already forced the bank to ask shareholder approval for 19-billion francs in capital-raising measures in February.

The creation of a so-called workout unit, sometimes called a “bad bank”, would allow UBS to confine the credit problems to a separate division, permitting management to focus on the group’s profitable operations and investors to assign value to them.

The bank needs a sound capital base to underpin its wealth-management business for rich clients, who have less tolerance to losing money than institutional investors and are easily irked by negative headlines. The rights issue is fully underwritten.

UBS has already replaced nearly all its top management and watched its share price more than halve since June, when the force of the subprime crisis began to register.

UBS shares have lost 45% this year on concerns it would need to raise capital again, making it the European blue chip bank to suffer the most in 2008.

Analysts had expected the bank to write down an additional 10-billion to 20-billion francs in 2008. ‒ Reuters

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