Swiss Private Banking is Insulated Against Market Turmoil

Paul A Adams, Geneva, 3 October 2007


Both of Switzerland’s largest banks, Credit Swiss and UBS, began October with profit warnings for Quarter Three 2007 because of sub-prime exposure. What does this mean and what effects will this have on the Swiss financial sector as a whole?

Peter Thorne of Helvea, a Pictet company, said: "UBS is taking a $1 billion hit in sub-prime direct exposure which even after the write-down is a staggering $19 billion. Another $0.9 billion write-down on collaterised mortgage exposure which after the write-down is some $4 billion, and then finally there are $1.8 billion other sub-prime related exposures not currently specified. In aggregate, this is $3.7 billion of write-downs or SFr 4.4 billion".

"UBS has also announced that it will take a $350 million hit on its leverage finance book which totals $12.7 billion in total, including $3.5 billion of commitments made after the write down".

He mentioned, "there had been rumours for some time that UBS was going to make a SFr 5 billion write-down and these have proved correct. More worrying though is the remaining $19 billion of sub-prime exposure making UBS the biggest casualty in the world from the sub-prime crisis, at least so far".

According to Mr Thorne "Deutsche Bank and Credit Suisse have actually made profits from shorting sub-prime to add to UBS’ embarrassment. Most of the sub-prime problem came with the absorption of the Dillon Read Capital Management positions, the failed fixed income hedge fund that was the bright idea of ex-CEO Peter Wuffli and John Costas, the former head of the investment bank".

Mr Thorne recalled that "UBS’ statement was followed shortly afterwards by an announcement from Credit Suisse that predicted its net income for Quarter Three 2007 will probably be in the range SFr1 billion to SFr1.6 billion. Quarter Three consensus expectations were for SFr 1.7 billion, so this is effectively a profit warning, albeit minor compared with that of UBS" .

This announcement was clearly made in light of the revelations from UBS. The bank’s statement contains no details on where the shortfall compared with consensus occurred other than a comment about them being adversely affected by recent market events.

Mr Thorne pointed out "Credit Suisse has said that it made profits shorting the sub-prime market so the losses are unlikely to be there, but on the other hand it does have lager leverage loan book and we suspect that the write-downs occurred there. Nevertheless, the Credit Suisse problems are small compared with UBS" .

Madeleine Hofmann of Julius Baer, told WealthBriefing,"that in recent weeks there had been rumours in the market to expect large losses at UBS. In the event they turned out to be much larger than anticipated". On the other hand, she said, "the share price is the proof of problems. And there has been no big reaction".

Mr Thorne believes that this is due to major senior management purge that has been swiftly made and much welcomed to say the least by major investors. In addition, he pointed out that there is tremendous value in UBS’ private banking business.

"We believe UBS has applied extremely conservative valuation techniques and therefore believe the worst is over", Claudia Meier of Bank Vontobel, told WealthBriefing. She added, "the increased visibility and the feeling that the worst is over is a positive and should help the share price. Yet, we continue to question how Marcel Rohner can handle the workload of being Group CEO and Investment Bank Chairman and CEO at the same time".

"These problems are unique to the investment banks and there should be little knock-on effect to the other important sectors of the Swiss financial industry" according to Christian Stark at Crédit Agricole Cheuvreux, Switzerland.

This view is shared by Andreas Venditti, Zurcher Kantonalbank, who told WealthBriefing that "the Swiss financial market is quite heterogeneneous". He expects little if any impact on the retail and private banking businesses "as they have no investment bank exposure. Whereas, the only risk for independent financial advisors will be from any significant fall in the equity markets".

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