Europe’s worst credit casualty

Apr 2 2008 by Iain Laing, The Journal

ONE of Europe’s biggest finance houses has revealed a multi-billion-dollar hit from the collapse of the sub-prime loans market.

Swiss banking group UBS announced a first quarter $19bn (£9.6 bn) writedown for US real estate assets. The charge came on top of an $18.5bn (£8.2bn) charge the bank suffered from bad investments last year.

There were fears this latest credit crunch fallout could affect trading in bank shares on the London stock market.

But the big players were all in positive territory yesterday, with some analysts putting the rise down to hopes that the worst of the credit crunch may be over.

Alliance & Leicester led the way with its shares rising nearly 5%, followed by Barclays, which was 4% better off. They helped drive the FTSE 100 Index up nearly 1%.

Head of UK equities at broker Hargreaves Lansdown, Richard Hunter, said the positive stance could also stem from fears in some quarters that UBS’s latest write-off would be even bigger.

He said: “It seems as though some predictions for the figure might have been as much as $25bn, so I think there might be an element of relief out there. For the moment it looks as though there could be some optimism that we are at least starting to turn the corner.”

Head of derivatives at GFT Global Markets, Martin Slaney, said: “This is symptomatic that the bear market is reaching a bottom. Investors seem to be saying that the worst is over.”

But Collins Stewart banking analyst Alex Potter cautioned that it was far too early to say whether the worst of the credit crunch was over.

UBS’s latest writedown saw the group post a net loss of £6.1bn for the first quarter of this year. This comes on top of a net loss of £2.2bn last year, its first annual closing in the red.

German group Deutsche Bank also warned of more credit crunch fallout, saying it expected to write off about £1.9bn in the first three months of this year because of the sub-prime crisis.

UBS’s huge losses make it by far the European bank worst hit by the collapse in sub-prime lending across the Atlantic and associated mortgage-related assets.

The bank also announced that it was seeking to raise £7.6bn of new capital via a rights issue and forming a unit to hold “illiquid” US real estate assets to help it deal with the continuing crisis.

Chief executive Marcel Rohner said that move and the capital injection would help the bank return to “sustainable value creation over time”, and “weather one of the most difficult periods in the history of the industry”.