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UBS, Deutsche Bank profit warnings reflect hard times ahead

2 April 2008

GENEVA – Two of Europe’s largest banks, UBS and Deutsche Bank, said Tuesday they are writing down billions more in bad investments, reflecting a wave of woe crossing the Atlantic from the U.S. subprime crisis. Banks and analysts agreed that there were more hard times to come.

Switzerland’s UBS AG, already the hardest-hit in Europe, announced the departure of its top official, saying it would post a first-quarter net loss of CHF 12 billion and seek CHF 15 billion in new capital.

UBS, Switzerland’s largest bank, said it sees losses and writedowns of approximately CHF 19 billion in the first quarter.
That puts its writedowns for the past nine months to CHF 37.4 billion, so far the largest reported by any bank.

Germany’s Deutsche Bank, which had appeared less affected by market turbulence, said it now expects writedowns of EUR 2.5 billion (CHF 4 billion) for the first quarter because of “significantly more challenging” market conditions.

The two banks added to earlier warnings that market conditions had worsened sharply in the second half of March, the latest fallout in Europe from a U.S. economic crisis stemming from the plunge in housing prices and the credit crunch triggered by rising defaults on risky mortgages.

But investors appeared unfazed by the gloomy reports, spiking share prices of both banks.

UBS’ shares responded most dramatically, rising sharply throughout the day to close up 12.27 percent at CHF 32.40 francs on the Zurich exchange. Traders and analysts said investors welcomed the capital hike and the departure of power-wielding chairman Marcel Ospel as giving the bank a chance to make a fresh start.

Deutsche Bank shares closed up 3.47 percent on the day, at EUR 74.50 (CHF $117.7) in Frankfurt.

Ospel, who had previously indicated he wanted to stay another year, became the latest victim of the subprime crisis at UBS, which last year let its chief executive and other top executives go.

“I have always stated that I ultimately take responsibility for the bank’s situation,” Ospel said in saying he would make way for general counsel Peter Kurer to become chairman.

He said he was able to leave because the bank had taken necessary steps “laying the foundation for the long-term success of the bank’.’

Standard & Poor’s cut its credit rating for UBS one notch to AA-, saying it “reflects our view that the risk management lapses, earnings volatility and need for new capital” was inconsistent with the AA rating the bank had enjoyed.

Fitch Ratings made a similar cut and said “The outlooks remain negative”.

Octavio Marenzi, head of financial consultancy Celent, said the UBS disclosures were “a clear indication that we are not out of the woods yet”.

“Indeed, the storm clouds are gathering ever more rapidly over the banking industry and, in particular, the U.S. banking industry, where most of UBS’s losses originated from,” Marenzi said.

Deutsche Bank analyst Mike Mayo said he expects global bank losses tied to the housing market to total an additional US$50 billion (€32 billion) during the first half of the year.

Mayo said declines in the housing market and in indexes that are used to help set values of mortgage-related securities and bonds indicate banks are in for another round of writedowns.

Financial services firms have already taken nearly US$190 billion in writedowns since the middle of 2007.

Morgan Stanley and consultancy Oliver Wyman said in a joint report that “investment banking and capital markets competitors look set to experience the worst hit to earnings in 20 years.”

Deutsche Bank and UBS AG said markets had worsened quickly and dramatically in March, as the credit crisis spread beyond mortgage securities.

The first bank warning about losses in March came from UBS’ crosstown rival Credit Suisse Group, which said two weeks ago that the conditions had evaporated its expected profit for the first quarter. Credit Suisse has until now been profitable despite the subprime crisis.

U.S.-based Lehman Brothers Holdings Inc. Monday became the latest in a string of North American banks, including Merrill Lynch & Co. Inc. and Citigroup Inc., to seek fresh capital.

Analysts were predicting more banking job losses this year in Europe and the United States.

“We expect to see the U.S. banking industry shed about 200,000 jobs in the coming 12-18 months,” said Celent’s Marenzi.

UBS, which has already cut more than 1,500 jobs so far, is set to cut more, chief executive Marcel Rohner said Tuesday.

[Copyright AP 2008]