will ubs be next insolvent bank to crash, page-2

Write-down Spotlight Shifts to European Banks


Now that Goldman, Lehman and Morgan Stanley have allayed the greatest fears about their liquidity, the focus is moving to European banks. A raft of rumors summarized by FT Alphaville caused havoc among Eurobank stocks today.

In this context, CreditSights offers a timely analysis of European bank exposure to Collateralized Debt Obligations. While there’s more writedown pain ahead, CreditSights does not anticipate a solvency issue.

UBS still looks most vulnerable to further write-downs, with SocGen, Barclays and RBS also in the frame, while Fortis appears to have been most conservative.

Credit Sights finds the difference in write-down ratios between the banks surprising. “For example, Barclays, RBS and SocGen are holding their super senior ABS CDOs (high grade and mezzanine combined) at well over 70% of face value, whereas Fortis is at 55%. The differences are even starker on the mezzanine tranches, ranging from 20% of face value at Dresdner to 80% at SocGen.”

“Our model indicates a shortfall in write-downs of over $3 billion for Barclays, RBS and SocGen, and of over $6 billion for UBS (NYSE: UBS).
Even if we accept that our model overstated write-downs for 2007 and was too conservative, for whatever reason, there will be additional write-downs since the year end that could be substantial - over $1 billion for Barclays, RBS and SocGen, and over $3 billion for UBS.”

Given possible write-downs on other parts of its portfolio, however (including RMBS and Alt-A mortgages), UBS’s performance is likely to remain under severe pressure in the first quarter, CreditSights says. “We continue to think that, with the exception of UBS, this will be an earnings question (and possibly a threat to credit ratings) rather than a solvency problem. We should note also that the UK banks report results semi-annually, so Barclays and RBS will not be releasing first quarter numbers, although they might decide to publish trading updates that are more detailed than usual.”

The CreditSights report CDO Losses at European Banks Revisited, provides analysis of each bank.

In a March 4 report, Morgan Stanley said it remained “Underweight UBS & short in our model portfolio on concerns that credit dislocation could add more downside. ”

In our bear case, we had been estimating ~$10-15bn of incremental losses for 2008; we revise this to $15-25bn (the latter we hope is a very low probability fat tail). This may appear harsh, but UBS has been consistently behind the curve in marks.”

The Swiss Finance Minister today said that UBS and Credit Suisse have “a solid capital base.”

Meanwhile, Bear Stearns forecasts writedowns of 1.5 billion Euros for French banks, led by Credit Agricole.