Does UBS Writedown Signal Banks Have Touched Bottom?

Apr. 3.08 | About: UBS Group (UBS)

It’s a strange world in which a $19-billion dollar write-down is seen as good news, but UBS’s (NYSE: UBS) “pre-announcement” of the same has many believing financial stocks have hit bottom and the worst of the damage is behind them.

The Economist takes heart in the fact that JPMorgan, Morgan Stanley, BNP Paribas and Goldman Sachs, are fully underwriting UBS’s accompanying SFr15 billion share issue. “They demanded an “aggressive” valuation as part of their due diligence of UBS, according to Daniel Zuberbuehler, director of the Swiss Federal Banking Commission. That suggests they are comfortable with UBS’s numbers, which should be somewhat reassuring to investors. Unless the markets continue to slide again, that is.”

CreditSights is not so sure the banks have touched bottom: “Presumably the market is betting that we are reaching the peak of the write-downs and is also buoyed by UBS’s rights issue. This could be premature. While our view has been that the market has overplayed the extent of the problems for many European banks, the next few weeks are likely so see some painful first quarter earnings announcements.”

More worryingly, banks’ comments about trading conditions in March do not hint yet at an imminent recovery.

One part of UBS that does seem to be working well is the wall between its analysts and the rest of the business. According to Bloomberg, UBS analysts say “Moody’s Investors Service is the least accurate assessor of the risks of subprime-mortgage securities among the three largest credit-rating companies, while Fitch Ratings is the best.”

However, by “least accurate,” they mean Fitch’s ratings are more in agreement with UBS’s expectations of defaults than Moody’s. This may well turn out to be the case but unless and until the defaults happen it is simply not accurate to say that one is more accurate than the other. And given UBS’s dismal experience with write-downs, we may want to defer judgment.

Moody’s assigns Caa2 or lower ratings to just 12% of the 292 bonds underlying benchmark Markit ABX indexes that UBS analysts expect to default, Bloomberg reports. Both Fitch and Standard & Poor’s tag 57% of the bonds with equivalent rankings, according to a report from the New York-based analysts yesterday. A rating of Caa2 or CCC is eight levels below investment grade.

According to Bloomberg, Fitch was rated the most accurate also because it doesn’t have AAA ratings on any securities tracked by ABX indexes that UBS expects to default, while Moody’s has 35 ranked the equivalent Aaa and S&P has 24 with top ratings, the report said. Fitch also rated the fewest ABX subprime bonds — only 200 of the 400 rated by Moody’s and S&P — meaning it was the “most conservative” when assessing new deals in 2005, 2006, and 2007.

At least UBS can’t complain Moody’s wasn’t conservative enough after the bank’s write-down announcement. Moody’s immediately downgraded UBS to B/ Aa1, while Standard & Poors and Fitch both downgraded it to AA-.