Markets live chat transcript for the chat ending at 12:12 on 1 Apr 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: hi there
PM: This is FT Alphaville’s daily stock market discussion.
PM: Welcome
PM: Neil Hume is with me
PM: Come on Neil — log in
PM: its not as tho there has been loads of news to distract you
PM: Hellooooo
NH: morning
NH: finally managed to log in
PM: Thought we’d ring the changes this morning.
NH: Yeah, we’re gonna talk about the banking sector
PM: This extraordinary UBS news – cheered everyone up. Literally.
NH: Well, cheered bank stocks up.
PM: Not least UBS – was up 10 per cent earlier.
PM: Now up a little over 6 per cent at 30.66
PM: Getting new stock at circa €12 – 58 per cent discount to Monday’s depressed price.
NH: And so the price soars.
NH: This is not an April Fool
PM: And so the price soars.
PM: I did talk to a friend at UBS this morning
PM: One we’d got past the april fool stuff, his only explanation was that it was a bear squeeze.
PM: So well flagged. And so many shorts out there – price was squeezed higher this morning.
NH: Ah, so there was a bank robber involved then?
NH: Got lynched did he?
NH: Sheriff Darling rode to the Alps.
PM: yeah, some one shorting on the baseless story that UBS would have to make humunguous new rightdowns !
PM: ha! trouble making idiot
NH: Well I think the shorting of UBS was probably going on here in London
NH: Anyway, the rackateers will be drowning in their own champagne this morning – cos look at the British banking sector….
Royal Bank of Scotland Group (RBS:LSE): Last: 351.75, up 14.5 (+4.30%), High: 352.50, Low: 331.25, Volume: 24.69m
Barclays (BARC:LSE): Last: 471.25, up 18.25 (+4.03%), High: 477.50, Low: 445.50, Volume: 22.22m
NH: Alliance & Leicester up 21p at 540p
PM: Im just surprised that HBOS is only up 18.5p at 580
PM: You don’t suppose this UBS news could be taken in the wrong way do you?
NH: What do you mean?
PM: Surely not that it is confirmation that some banks are actually close to the brink?
PM: And that UBS has had to raise about CHF 15 billion cos it needs to shore up its balance sheet – principally cos of mortgage related lossees?
NH: Oh no, surely not. That’s just rumour mongering.
NH: That’s spivs and blogsters trying to damage our banks.
PM: Vagabonds someone said
NH: Just look at Lehman Brothers
NH: They’ve said the truth. They’ve said it like it really is.
PM: Yeah – Lehman are raising $3bn in additional capital cos their investors wanted to buy more stock.
NH: 
NH: Yes, Lehman reluctantly gave in to this special pleading from its investors by issuing new convertibles.
NH: Charitable act – cos there’s also a 7.5 per cent coupon.
PM: breaking news: Lehman Bails Out Investors
NH: Of course, the real story is that the bank has done this to dispel rumours that it could face capital problems similar to those that sank Bear Stearns.
PM: Except that this one of the most expensive PR campaigns in history.
PM: Its been saying for weeks that its capital position was strong – and so to prove the point its made its capital position even stronger.
PM: 
PM: Anyway, on UBS have we got any research?
PM: Helen’s doing a separate post on the research, but we can still run stuff here.
NH: We’ve got a lot. But it really all says the same thing.
NH: That said – Merrill were ahead of the curve on this one yesterday.
PM: Oh yes, we do enough slagging off of ML analysts, so we should tip our hat when they produce something on the money.
PM: So, step forward Derek De Vries, CFA
NH: Here’s what he wrote yesterday
NH: Q1 wasn’t an easy quarter
We expect the Q1 results will bring another wave of write-downs and
earnings disappointments in the investment bank. While synthetic indices
rallied off lows at the end of March, we still think the Swiss banks will need
to write-down their exposure to Alt-A assets, subprime assets, leveraged
finance, and commercial real estate. We expect UBS’ Q1 results will include
US$ 11 billion of write-downs resulting in a loss for the total group of CHF
8.2 billion. We expect Credit Suisse’s Q1 results will include US$2.7 billion
of write-downs and result in a loss for the total group of CHF 200 million.
We forecast US$11 bil of write-downs at UBS
As we stated in our March 6th note entitled “A clearing price on Alt-A” we think
that a conservative marking of UBS’ legacy assets would lead to a write-down in
the region of US$ 2 billion. Nevertheless, we don’t expect UBS to take a US$21
billion write-down with its Q1 results. Instead we have included a more optimistic
US$ 11 billion write-down estimate in our income statement forecast. Table 3
below shows how we arrive at the US$11 bil and US$21 bil figures.
NH: And here is what Mr De Vries said this morning:
NH: This morning UBS announced the big kahuna of legacy write-downs – CHF 18
billion and a CHF 15 billion capital raising. The write-downs compare with our
forecast of CHF 11 billion in Q1 and CHF 21 billion of total necessary writedowns.
So we can’t say with certainty that this will be the last write-down, but we
are fairly certain that after taking CHF 4 billion in Q3, CHF 14 billion in Q4 and
now CHF 18 billion in Q1 UBS has broken the back on its legacy writedowns. A
CHF 15 billion capital raising is in-line with our expectation.
NH: The Q1 loss is approximately CHF 12 billion. That includes the CHF 18 billion
write-down partly offset by CHF 2 billion of fair value accounting gain on your own
debt and CHF 3.8 billion of fair value accounting for the option embedded in the
mandatory convertible – or, said another way – the money GIC lost when it bought
the UBS mandatory convertible. That last part was unexpected by us, and still
seems a bit odd.
NH: Q1 pre-tax profits in the Wealth Management & Business Banking business were
CHF 2.1 billion versus our forecast of CHF 2.2 billion and profits in asset
management were CHF 300 million versus our forecast of CHF 400 million. Net
new money in Wealth Management was positive and net new money in private
banking is negative – that isn’t much detail, but both are inline with our forecast.
After everything UBS expects to have a Tier 1 ratio of 10.6% – which still isn’t that
strong, but if the write-downs are over the Tier 1 ratio should rebuild quickly.
We think the market will take this well – and wouldn’t be surprised to see the
shares finish the day as an outperformer.
NH: This is another one that caught my eye – from Keefe Bruyette & Woods
NH: They have three bear points to note. One neutral and one bull.
PM: Let me guess, the “bull” point is that Marcel Ospel is departing.
NH: In one!
NH: Bear (1): Capital raising at least 19% dilutive. We estimate the issuance of CHF15bn new shares to be ~19% dilutive with a zero discount (marginally more if at a discount, given the adjustment to the mandatory convertible). The rights issue is fully underwritten at ~CHF12 per share (meaning if no buyers can be found at higher levels, the underwriters will acquire at CHF12 per share). Pro forma for the capital raising, the group would have a 10.6% tier 1 ratio.
NH: Bear (2): Ominous inflow commentary. That the WM&BBS division only “expects” to achieve positive inflows (without quantifying them) does not help diminish fears that the core WM franchise has been impaired by reputational problems elsewhere.
NH: Bear (3): Mortgage exposures. UBS reduced its exposure to subprime/Alt-A by ~$23bn during 1Q08, the vast majority of which seems due to ~CHF19bn of writedowns and losses (rather than true sales of assets). While undisclosed, we note that the marks UBS has taken will have come under scrutiny from the external underwriters in recent weeks, which may inspire some confidence in the level of the marks. However, with $31bn of risky mortgage assets remaining ($15bn subprime, $16bn Alt-A), UBS could yet be exposed to downside.
NH: Neutral (1): Accounting gain. UBS’s 1Q08 net profit benefited from a CHF6bn positive accounting gain on revaluation of own debt and the mandatory convertible.
NH: Bull (1): Ospel replaced. Chairman Marcel Ospel will not seek reelection at the pending AGM, to be replaced by Peter Kure, currently Group General Counsel and a member of the Group executive Board since 2002. Ospel’s replacement is likely to be positive for sentiment
PM: Of course UBS not the only European bank with good news out this morning – there’s also Deutsche Bank.
PM: Actually we’re getting into a groove now.
PM: I’ve got more stuff to support the price of HBOS and other UK banks.
NH: Keep the robbers at bay.
PM: This is from Louise Alissi at Bear Stearns.
NH: Poor woman. Imagine trying to be a banks analyst at BS at the moment!
PM: Sorry, correction!
PM: It’s Robert Sage on this one
NH: Bear sage!
PM: Follows on from Crock’s crooked numbers yesterday.
Readers may also know this former bank as Northern Rock.
PM: (That’s crooked as in warped by the credit crunch etc. NOT crooked as in criminality. Just to be clear.
Mr Schilling.)
PM: 
PM: Anyway – from Bear’s bank Sage in London:
PM: Northern Rock (not rated) published its 2007 full-year results yesterday morning. As a read-across for the UK banks, we draw attention in particular to the issue of credit quality, which in our view has potentially wider sector implications. Northern Rock’s reported rises in arrears metrics were significant, particularly residential arrears balances, which increased from £411m, or 0.47%, in H1 to £517m, or 0.57%, for the full year.