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UBS and Deutsche losses mount, but bank fog clearing

1/04/2008 - 14:06
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UBS 141,10 -0,42%

By Steve Slater

LONDON (Reuters) - UBS(UBSN.CH)and Deutsche Bank took a $23 billion hit on their risky assets and the Swiss bank asked investors for more cash on Tuesday, but Europe's bank shares rallied on hopes that the end of another torrid quarter could mark a turning point.

UBS unveiled a $19 billion writedown to double its losses on the value of toxic assets and became the hardest hit bank from the U.S. subprime crisis and subsequent credit crunch. It also parted company with its chairman and said it will hive off ailing businesses into a separate unit.

"The one saving grace in this is that banks are acting quickly to highlight their exposure," said Peter Dixon, economist at Commerzbank. "The quicker the bad news is out in the open, then the quicker we can start to repair the problems."

"The Japanese crisis of the early 1990s was exacerbated by the failure of banks to admit the degree of their problems," he noted.

News UBS is seeking to raise 15 billion francs ($15 billion) through a rights issue in a second emergency attempt to shore up its balance sheet was not a surprise, but more dramatic than expected by many.

Its shares surged 7 percent as some viewed the bold move as more positive than smaller, regular writedowns, which one analyst had said could result in "death by a thousand cuts."

"It's a kitchen sink job. They've separated all their toxic waste. If they're going to finance that then everyone is saying this is the beginning of the end, this is the last capital increase," one trader said.

By 6:15 a.m. EDT the DJ Stoxx European banking sector index was up 3 percent at 354 points, its highest level for a month and 15 percent above its 3-1/2 year low two weeks ago.

Britain's Barclays and Royal Bank of Scotland , Italy's Unicredit and France's Societe Generale all rose over 4 percent.

"It's too early to say we're definitely through the worst of this, but it would appear from the market's reaction today to what UBS has done, and from recent interest in buying distressed assets, that maybe we can at least start to see the end of the apparent freefall in certain asset values," said Leigh Goodwin, bank analyst at Fox-Pitt, Kelton.

RADICAL INTERVENTION?

The sector's revival was also aided by signs that U.S. Treasury Secretary Hank Paulson and central bankers are considering radical strategies to boost liquidity.

Banks are hoarding cash in case they need it and as concern lingers about counterparty risk, which has driven up the cost for all banks and corporates of borrowing funds.

"More significant (than UBS) is the anticipation that Paulson is going to lead a global concerted effort to free up the credit crunch," said Simon Maughan, analyst at MF Global.

"For a long time we've been worried about moral hazard ... we're now past that point, what we're trying to do now is save the banking system, and the price that banks will pay is tougher regulation going forward."

A banking conference in London hosted by Morgan Stanley attended by top executives and investors had also helped to lift the mood, analysts said.

Deutsche Bank rose 3 percent after unveiling a 2.5 billion euro ($3.9 billion) writedown. The hit appeared modest by comparison to UBS, and was not a surprise after it warned last week that the credit market turmoil could hit 2008 profits, but was more than its 2007 writedown.

"Deutsche Bank took advantage of the timing, coming on the heels of UBS so as not to have to rattle the market a second time," said Heino Ruland, analyst at FrankfurtFinanz.

Credit Suisse is expected to follow its Swiss rival UBS in unveiling more losses now the first quarter has ended, but on a more modest scale. Its shares jumped 5 percent.

But some analysts warned that the sector still needs to work through further pain.

European banks which need to rebuild their capital will also have to compete with U.S. rivals for funds.

Lehman Brothers said late on Monday it plans to raise $3 billion of capital.

The bank said it wanted to quash concerns about its stability after speculation it did not have enough funding, heightened after smaller rival Bear Stearns was forced into a firesale.

(Additional reporting by Rebekah Curtis, Sitaraman Shankar and Dominic Lau in London and Peter Starck in Frankfurt)

(Editing by Louise Ireland and Jason Neely)


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