Swiss bank UBS is not in urgent need of fresh capital, but may be if it does not make stable profits soon, analysts said as a bail-out of Citigroup showed the financial crisis is far from over.
Switzerland's top bank regulator said on Sunday that UBS could need extra state capital on top of a planned 6.0-billion-Swiss-franc ($4.92-billion) handout on which the group's shareholders are due to vote on Thursday.
UBS' stock, which had lost nearly 50 percent in value this month and hit an all-time low last week, rallied 12 percent on Monday and was the top gainer in the Dow Jones index of European banks as investors hoped the $20-billion rescue of Citigroup would help stabilise the banking system. While the Swiss bail-out package has allowed UBS to move $60 billion of toxic assets to a central bank-run fund, the bank still needs to stem the flow of client withdrawals, which came to a record $49 billion in the third quarter.
"It is sensible to keep the option of further state aid open," said David Williams, an analyst at Fox-Pitt, Kelton.
"As it stands, UBS is pretty OK, but they have to make profit to continue to build capital. If they don't they will need to take more state aid," he added.
The company's extraordinary shareholder meeting may give the world's top wealth manager the chance to update investors on the state of its core private banking arm, which has seen a slowing of money outflows since the state intervention.
Shareholders may also seek clarity on the impact from a high-profile U.S. tax probe against UBS that Morgan Stanley says may cost the bank up to $1 billion in fines or settlement.
A foray into risky assets has forced UBS to make nearly $49 billion of writedowns in the credit crisis, more than any other bank in Europe.
Morgan Stanley predicts outflows of 77 billion Swiss francs in 2008 in wealth management, UBS' main cash-generating engine, and a 65-billion-franc outflow in asset management.
NO IMMEDIATE THREAT
The Swiss rescue package will help UBS boost its Tier 1 capital ratio, a measure of financial strength, to nearly 11 percent, a reasonably strong level even by current toughening European standards, analysts say.
Since UBS has moved nearly all of its troubled U.S. assets, mostly subprime-related investments, to the central bank fund it does not face the immediate threat of further writedowns.
"It is probably fair to say that UBS does not need another capital injection at the moment and it compares well with others," said Simon Adamson, a senior analyst with CreditSights.
"But it is impossible to say for sure given the extreme volatility we are still seeing on the markets."
Analysts say banks around the world are under pressure to meet tougher and tougher standards for bank capital. If only six months ago a 6 percent core Tier 1 ratio and 8 percent Tier 1 were considered adequate for a major bank, the bar has now moved to 8 and 10 percent respectively.
Banks such as Spain's Santander and Britain's Standard Chartered, which had initially said they did not need additional capital, rushed to raise cash this month as market conditions worsened.
In Switzerland, UBS faces additional pressure from new requirements by the bank regulator that include a 3 percent leverage ratio at a time when selling assets on the market is tough, with prices low and few buyers around.
The requirements have already been met by Swiss competitor Credit Suisse, which managed to tap its investors but has said it is facing challenging market conditions.
"We have assumed that UBS's capacity to organically generate capital should allow it to reach the 3 percent leverage ratio target set by the Swiss authorities in 2009," Morgan Stanley said in a research note.
"However, should UBS not return to profitability in 2009, or should it experience punitive fines in the United States or very heavy trading losses, we feel that pressure would increase to address the situation and reach capital ratios equivalent to Credit Suisse."
