UBS Sees Light At The End Of The Tunnel

By Greg Sushinsky | February 16, 2009 AAA

Swiss banking firm UBS (NYSE:UBS) reported a $7 billion loss for the fourth quarter, bringing its full-year 2008 losses to $17 billion. The fourth quarter losses follow write-downs related to the credit crisis totaling $49 billion. In addition, UBS's write-downs include trading losses and charges related to sales to the Swiss National Bank, which removed toxic assets from its books. Additionally, UBS announced further job cuts in its ongoing restructuring plans.

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Bad Time To Be A Bank
To a cynic, yet another big bank's negative earnings report is hardly newsworthy, given the horrible banking climate of the past year, characterized by huge, widely-publicized write-downs, shriveled market caps and questionable futures for some. UBS, which lost about $80 billion in market cap - from $116 billion to $35 billion - within the last year, is certainly among the class of big banks where losses cease to surprise. Citigroup (NYSE:C), famously the poster child of this financial mess, has melted from a $255 billion market cap to a relatively tiny $19 billion. Its staggering decline has investors wondering what worth, if any, remains for shareholders' equity. Similarly, Bank of America (NYSE:BAC) has seen its stock price follow Citigroup's into the "$5 or less" bin following a recent run of bad news. Even the relatively healthy JPMorgan Chase (NYSE:JPM) has experienced a 50% drop in its market cap - from $165 billion to $85 billion. Still reporting positive earnings and holding far fewer bad loans, some would deem this bank's plight unfair. Wells Fargo (NYSE:WFC), another big bank that has performed relatively well throughout the crisis, saw its value trimmed by roughly two-thirds, despite its success at maintaining profitability.

Painted With The Broad Stroke Of The TARP Brush
What these big banks have in common, besides the fact that some hold contaminated assets, is that they fall into the TARP group. By accepting Troubled Asset Relief Program (TARP) money from the Treasury, in amounts that range from $25 billion apiece for JPMorgan Chase and Wells Fargo to $45 billion each for Bank of America and Citigroup, these banks tend to be grouped together and, therefore, taken down by investors without discrimination. UBS, however, did not receive TARP money. But, because it was allowed to rid itself of toxic assets by other means, it is lumped in with the others. The UBS stock price has been shot down along with the others, but the original TARP idea, that of soaking up the billions in bad loans by the Treasury, has not yet proceeded to the "bad bank" stage, unlike the response by the Swiss government. The week's wrangling in Washington over the bailout going forward seemed late in addressing this crucial factor for restoring the health of the financial system. At present, this matter remains unresolved. (To learn more about TARP, read our related article Liquidity and Toxicity: Will TARP Fix the Financial System?)

Dim Light At The End Of The Tunnel?
On the face of it, the UBS earnings report is just another part of the ongoing train wreck that is the big banks. Not surprisingly, many investors have stopped trying to guess when the troubles will end. Yet, the news which appears so bleak for UBS and, ultimately, for other banks, may not be entirely. The model of the Swiss rescue of UBS, which will effectively remove toxic loans from the bank's balance sheet, may allow it to move forward. Still feeling the effects of the write-downs, UBS has undertaken a massive restructuring to focus on its core strength of wealth management, the sales of some of its assets and methods to stem the tide of capital outflow.

Bottom Line
Nowadays, earnings forecasts of financial institutions often are dismissed or considered absurd in the face of near-zero visibility. However, UBS cautiously predicts a return to profitability in 2009. Even if this projection is premature by as much as a year, this glimmer of hope could signal a reversal of fortune for UBS, even if only a scrappy beginning. If Congress comes up with a workable plan to help U.S. banks emerge from the toxic swamp of bad assets, from which UBS also hopes to emerge, there may indeed be financial light waiting at the end of the banking tunnel.

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