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Grim Q1 Shows UBS

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A clear message emerged from UBS's weak trading update on Wednesday: the road to recovery for the troubled Swiss bank will be a long and bumpy one.

UBS disappointed investors with news of a $1.7 billion first quarter loss, a thinning capital cushion, a failure to stem an exodus of wealthy clients, and a wary outlook from new Chief Executive Oswald Gruebel.

It was a stark warning compared to improving signals from a number of its peers.

US banks Goldman Sachs and Wells Fargo surprised investors with upbeat quarterly results and Deutsche Bank, Barclays and other European rivals have indicated the worst of the financial crisis had passed.

"UBS is making some improvement, but the situation is still very critical and the bank seems to be lagging behind competitors," said Sebastien Lamaire, an analyst with Natixis Securities.

"They need to restore market confidence and will need time."

Many analysts and investors said UBS remains an interesting restructuring play despite its many problems. Its shares have crashed 72 per cent since the start of 2008 compared to 43 per cent at great rival Credit Suisse, yet much of its franchise remains highly regarded, especially in private banking.

CEO Gruebel, the veteran former Credit Suisse boss pulled out of retirement by UBS seven weeks ago, is seen as the man to kick the bank back into shape. He acknowledged the size of the task, forecasting "a long road back to success without any quick fixes."

Most worrying on Wednesday was a drop in UBS's Tier 1 capital ratio to "about 10 per cent" at the end of March from 11 per cent at the end of 2008, and 23 billion francs of outflows from its key wealth management and Swiss bank division.

Although stronger than many European peers, UBS's capital is eroding and could trigger the need for a capital increase, especially as the bank said its outlook for risk positions, which still include toxic exposure related to monoline insurers, "has not changed materially".

"We are again at a critical level and there isn't much of a buffer," said Andreas Weese, an analyst with UniCredit.

Credit Suisse, one of the world's best capitalised banks, had a Tier 1 ratio of 13.3 per cent at the end of December. Deutsche Bank's was 10.1 per cent and HSBC's rose to 9.8 per cent after a recent fundraising.

European banks average above 8.5 per cent after regulators forced them to build cushions in anticipation of rising bad debts and lower profits.

UBS's traditional capital advantage, prized by its private banking clients, has been eroded by more than $50 billion of writedowns and balance sheet rebuilding elsewhere.

The Swiss regulator has at least given UBS until 2013 to apply recently introduced capital requirements that are tougher than elsewhere.

Wealth Management Worries
UBS's biggest challenge is restoring trust in order to staunch withdrawals by its wealthy clients, analysts said.

While a cash injection from the state and a "bad bank" to absorb toxic assets have put the question of UBS's survival behind it, the Swiss bank is grappling with a high-profile U.S. tax fraud investigation that has prompted clients to jump ship.

"We believe UBS has a long way to go to improve its reputation and rebuild trust to stop the outflow of net new money," said Frank Braden, equity analyst at Standard & Poor's.

And plans to cut up to 4 billion francs from annual costs by 2010, mostly achieved by 8,700 job cuts, drew mixed responses.

"The additional round of cost savings and job cuts will hurt the bank's ability to retain key personnel for when conditions do improve," Braden said.

The problems leave doubts on when UBS will return to profit.

Matthew Clark, analyst at Keefe, Bruyette & Woods, said it was hard to know when UBS would return to profit and its share price premium, trading at about 1.7 times net asset value (NAV), was unjustified. European banks are trading near 1 times NAV on average, with investment banks near 1.3 times.

Others saw a chance for a return to quarterly profits later this year, although the overall 2009 results should show a loss.

"This first quarter now is the most conservative quarter, where they have taken everything into account," said Vontobel's Teresa Nielsen. "At group level they can be profitable in the third quarter."

A glimmer of light is that Gruebel has cleared the decks in the first quarter to create a platform for recovery. That is likely to include the axing of entire business lines, if not more radical solutions.

But after a torrid two years, investors are impatient.

"The only reason why we are still with UBS is because hope dies last, but if this carries on we will not tolerate it anymore," said Blandina Heyne, a small shareholder.


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