Moody's Investors Service has downgraded the bank financial strength rating and the long-term debt and deposit ratings of UBS. The BFSR was lowered to C from B-, corresponding to a change in the bank's unsupported baseline credit assessment to A3 from A1.

The ratings for deposits and senior debt were lowered to Aa3 from Aa2, while the ratings for senior subordinated debt were lowered to A1 from Aa3. The bank's Prime-1 short-term ratings were affirmed.

The agency also downgraded the ratings of UBS's non-cumulative trust preferred stock and Tier 1 capital securities to Baa3 from A1. This action incorporated both the BFSR downgrade and Moody's revised methodology for rating bank hybrid securities. The outlook for all of UBS's ratings is negative.

The two-notch downgrade of the BFSR reflects Moody's view of the considerable challenges that UBS continues to face in both its investment banking and wealth management businesses. While both of these areas are beginning to show early signs of a turnaround, Moody's believes these challenges are unlikely to be short-lived.

Moody's views UBS's leading wealth management franchise as a critical underpinning of its overall financial strength. However, this business has suffered a serious erosion of customer confidence, suffering net new money outflows for seven consecutive quarters. The net outflows have further pressured profit levels that were already under pressure from lower asset values, subdued client activity, and declining net interest margins.

"We believe that UBS's wealth management franchise is unlikely to return to previous levels of profitability until the bank can fully restore customer confidence," said David Fanger, Moody's senior vice president. "But we expect that restoring customer confidence will take some time, in light of customer sensitivity both to the bank's own difficulties and lack of profitability and to potential further challenges to Swiss bank secrecy."

The rating agency expects that such challenges are likely to be a continuing part of the private banking landscape for a while, as deficit-burdened countries strengthen their tax collection efforts.