Reports

UBS Threatened With Credit Rating Downgrade

Tom Burroughes, Editor, London, 16 June 2009

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UBS’s credit ratings may be cut by more than one notch by the rating agency Moody’s Investor Services, which is concerned about challenges to its investment banking and wealth management operations.

Moody's said it may cut the bank's Aa2 long-term senior debt and deposit ratings and it Aa3 subordinated debt ratings. The downgrades will be limited to one or two notches at most, the rating agency said in a statement late yesterday.

"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 benefitted from substantial capital infusions over the past two years, the bank's ability to generate capital internally remains challenged,” he said.

UBS, which is the world’s largest wealth manager, has chalked up around $50 billion in credit write-downs since the advent of the financial crisis; it has received public funds from the Swiss government and also suffered from a bruising lawsuit about its alleged role in helping wealthy US clients evade taxes.

The rating agency said it was concerned that UBS’s losses have harmed the wealth management segment of UBS.

“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 [Swiss National Bank] 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,” the rating agency’s statement said.

“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 US 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,” it said.

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