Kiss another $19bn goodbye.
The latest numbers from UBS are worse than many analysts had forecast – and more than double the value tied to subprime-related securities written down by the Swiss bank. It seems that the bank has taken on board advice to cut hard, and cut deep, rather than draw out what has been called “death by a thousand cuts.” In doing so, it may just be able to put the worst of uncertainty and risk related to its portfolio of toxic assets behind it.
It all equates to a first quarter loss of about SFr12bn (about $12bn) and another capital raising for its beleaguered shareholders. The group will seek to raise SFr15bn through a rights issue, underwritten by JPMorgan, Morgan Stanley, BNP Paribas and Goldman Sachs.
How will UBS investors, who only in February met to approve the bank’s last SFr13bn capital injection, react to this latest cash call? They will have a chance to vent their increasing frustration at the AGM later this month. But this time, at least, they are being given a chance to take part in the bank’s capital raising. Two months ago, they were merely voting to let in the GIC and a Saudi Arabian investor. Whether or not they choose to participate is another matter. UBS shares looked set to take a hit early on Tuesday, but the stock surprisingly moved higher on the open, gaining as much as 7 per cent.
Two further points of interest from the latest UBS release. Investment banking looks set for serious swingeing cuts – which is no great surprise. The squeeze now sounds like it will effect every department going.
The new leadership of the Investment Bank will further focus on resizing the business in accordance with the current market opportunities, including strategic reductions in all major cost categories.
Secondly, as part of efforts to ringfence the problems associated with its foray into structured finance and to contain risk-taking elsewhere in the investment bank, UBS has formed a new unit to hold illiquid real estate assets. It said:
For risk management purposes UBS has already segregated most of its assets related to US residential real estate into a portfolio work-out unit, separating these positions from its other, profitable, businesses. UBS today announces that it will form a new entity to hold substantial parts of the work-out portfolio, which will initially be wholly owned and financed by UBS.
The division is probably psychologically pleasing for the bank – but hiving off the problem children into separate, UBS-backed entity, like a conduit, may also present further solutions down the line. While it will “initially” be wholly owned and financed by UBS, this toxic spawn could later be quickly sold to a brave investor looking to pick up assets on the cheap. Or perhaps it could be further distanced from the bank as the commercial paper market picks up, in a new and improved variant of everyone’s favourite the SIV?