UBS Financial Rating Cut by Moody’s on Subprime Mortgage Loss

UBS AG, Europe’s biggest bank by assets, had its financial-strength rating cut by Moody’s Investors Service for the first time since 1998 because of concern about losses from U.S. subprime mortgage securities.

“UBS’s subprime-related exposures have a large loss content, some of which has been recognized to date, which negatively impacts the bank’s earnings stability,” analysts led by Antonio Carballo said in a statement today. Moody’s predicted further “meaningful” writedowns and cut its financial strength rating by one level to B+, the third-highest grade. UBS kept its top Aaa senior debt and deposit ratings.

UBS reported its first quarterly loss in almost five years last month after writing down $4.4 billion on fixed-income securities. The Zurich-based bank may have to mark down $3 billion more in the fourth quarter and $5 billion next year, which could “damage the bank’s core franchise” of wealth management, Bear Stearns Cos. analysts said today.

“Until the subprime issue is put behind the bank and some normality returns to earnings, uncertainty will remain,” London-based Bear Stearns analyst Christopher Wheeler wrote after cutting the stock to “peer perform.”

UBS’s stock has fallen 24 percent so far this year, reducing its market value to 117 billion Swiss francs ($104 billion). That compares with a 14 percent drop at the Bloomberg Europe Banks and Financial Services Index.

LTCM Downgrade

Credit-default swaps based on the debt of UBS were unchanged after the ratings cut at 57 basis points, according to Deutsche Bank. Credit-default swaps, used to speculate on a company’s ability to repay debt, rise as credit quality worsens.

Standard & Poor’s downgraded UBS last month by one level to AA, its third-highest ranking.

Moody’s last cut UBS’s financial-strength rating in December 1998 after the bank announced a third-quarter loss of 911 million Swiss francs, as its investment in U.S. hedge fund Long-Term Capital Management LP evaporated.

Moody’s said its outlook is “stable.” Any further downgrades in the financial-strength rating would probably trigger a decline in the debt and deposit ratings, Moody’s said.

Improvements in the bank’s risk management will continue to be an important factor in UBS’s rating, Moody’s wrote today. The losses are “manageable within the bank’s strong earnings capacity and high capital levels,” the statement said.

UBS Financial Rating Cut by Moody’s on Subprime Loss
By Aaron Kirchfeld | Bloomberg