Just as the ECB warns that commercial banks in the euro-zone may lose another $283bn by the end of next year on financial writedowns, Moody’s finds equivalent cause for concern at Switzerland’s most beleaguered bank, UBS.
In fact, the rating agency is worried enough to consider downgrading the bank by more than one notch, which considering half of the banks’ assets are already the property of the Swiss National Bank is not really that reassuring for Switzerland itself.
Here’s the Moody’s statement (our emphasis):
London, 15 June 2009 — Moody’s Investors Service today placed the long-term debt and deposit ratings of UBS AG and affiliates (deposits and senior debt at Aa2, subordinated at Aa3, trust preferred and capital securities at A1) on review for possible downgrade.
Moody’s bank financial strength rating (BFSR) for UBS of B- was also put on review. The B- BFSR translates into a baseline credit assessment of A1. The Prime-1 ratings on the short-term obligations of UBS AG and affiliates were affirmed.
“The review reflects Moody’s view of the considerable challenges that UBS continues to face in its two largest business lines: Investment Banking and Wealth Management,” said David Fanger, Moody’s Senior Vice President.
Moody’s believes these challenges are unlikely to be short-lived, and pose greater risk to bondholders than it had previously believed. In addition, while the bank has benefited from substantial capital infusions over the past two years, the bank’s ability to generate capital internally remains challenged.
“Given the magnitude of the bank’s challenges and the length of time it may take to fully address them, the bank’s ratings are vulnerable to a downgrade of more than one notch,” said Mr. Fanger. This is especially true for the bank’s BFSR. However, because of the bank’s high degree of systemic importance, any downgrade of the bank’s deposit and senior debt ratings is likely to be limited to one or two notches at most, consistent with Moody’s existing bank rating methodologies as well as its recent special comment (“Calibrating Bank Ratings in the Context of the Global Financial Crisis,” February 2009). ”
A widening of the gap between the rating on the bank’s senior unsecured debt and the ratings on its junior subordinated and hybrid capital instruments is also possible,” Mr. Fanger noted. In Investment Banking, although UBS has sold a considerable portion ($39 billion) of its legacy exposures to the Swiss National Bank (SNB), it remains exposed to potential additional losses on its remaining legacy exposures, most notably in its exposures to the monoline financial guarantors.
In addition, in Moody’s opinion the bank appears to have benefited less than many of its peers from the recent improvement in trading margins and volumes among more liquid capital markets instruments. “The bank has also experienced a significant turnover of senior managers over the past two years, which gives us some concerns about the continuity and effectiveness of management,” Mr. Fanger added. Moody’s views UBS’s leading Wealth Management franchise as a critical underpinning of its overall financial strength.
However, the bank’s sizeable losses appear to have contributed to an erosion of customer confidence in this business. This was most apparent in the outflow of net new funds experienced during the fall of 2008. That outflow diminished after the bank agreed to sell assets to the SNB and issue a mandatory convertible note to the Swiss Confederation. However, Moody’s believes that were the bank to suffer additional losses on its remaining legacy exposures it could potentially further undermine customer confidence.
UBS’s Wealth Management franchise also faces challenges due to customer concerns over privacy, as evidenced by continued net money outflows during the first quarter of 2009. These concerns were fuelled by demands made of UBS by U.S. authorities regarding the sharing of customer information, and by the responses of the Swiss government to those demands as well as to the demands of the OECD and the European Union.
“Repairing this damage may take time, Mr. Fanger said, “especially in light of the legal obstacles UBS faces in reconciling the competing demands of U.S. and Swiss authorities over bank secrecy.” At the same time, revenues in Wealth Management are also under pressure due to market-driven declines in assets under management and reduced client activity.
Moody’s believes that this leaves the bank with more limited financial flexibility to manage its challenges. The review will focus on the bank’s vulnerability to any further loss of customers in its wealth management franchise, its future earnings prospects under expected and stress scenarios, and its strategic direction.
The review will also consider the potential effectiveness of the changes the bank has made to its risk management processes and oversight. However, the rating agency believes the significant losses at many wholesale investment banks over the past two years, combined with the increased complexity and opacity of their positions, argue for skepticism about the robustness of risk management within the industry. (See Moody’s October 2008 special comment “Impact of the Credit Crisis on Moody’s Rating Methodology and the Credit Profiles of Investment Banks.”)
Moody’s previous rating action on UBS AG was on 17 October 2008 when Moody’s affirmed the ratings of UBS AG following the bank’s announcement that it had agreed to sell of up to $60 billion of legacy assets to the Swiss National Bank and to issue CHF6 billion of mandatory convertible notes to be purchased by the Swiss Confederation. The principal methodologies used in rating UBS AG are “Bank Financial Strength Ratings: Global Methodology” and “Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology”, which can be found on www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating UBS AG can also be found in the Credit Policy & Methodologies directory.
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Moody’s places UBS on review for downgrade - Moody’s