Standard & Poor’s Ratings Services said that it revised its outlook on Swiss banking group UBS AG to negative from stable. At the same time, the ‘AA+/A-1+’ counterparty credit ratings were affirmed.
Furthermore, Standard & Poor’s revised its outlook on core subsidiaries UBS Ltd., UBS Loan Finance LLC, UBS Bank (Canada), and UBS Securities LLC to negative from stable. Additionally, the ‘AA+/A-1+’ counterparty credit ratings on these four entities were affirmed.
“This action reflects Standard & Poor’s view that UBS’ performance, particularly its result for the third quarter of 2007, is likely to be significantly challenged by the current market dislocation,” said Standard & Poor’s credit analyst Richard Barnes.
UBS’ new CEO commented at the second-quarter result announcement on Aug. 14, 2007, that the investment bank’s third-quarter performance would be very weak if the turbulent market conditions seen in early August persisted. As the environment remains very difficult, it appears increasingly likely that third-quarter earnings will be adversely affected, with credit trading particularly tested. The performance of the large wealth and asset management businesses is much more stable and will mitigate the potential weakness in the investment bank, but this may not be sufficient to produce a groupwide result that is consistent with the current rating level.
The ratings affirmation reflects UBS’ strong liquidity management, robust capitalization, and diverse business profile.
“The negative outlook reflects Standard & Poor’s view that, in the current market environment, UBS may be challenged in maintaining a performance level that is consistent with the current long-term rating. We will reassess our earnings expectations on the basis of the third-quarter results, with a particular focus on the valuation policies used for illiquid assets,” added Mr. Barnes. The long-term rating may be lowered if weak investment banking returns diminish the earnings prospects for the overall group. The outlook may return to stable if UBS demonstrates a resilient performance in the face of current market conditions.
