UBS shares fall 8% as outlook concerns investors

UBS, the European bank hardest hit by the subprime crisis, offered a gloomy outlook yesterday, raising questions about how it will handle its exposure to the US residential mortgage market.

Shares in the Swiss bank fell more than 8 per cent in late trading as investors praised its greater candour but expressed concern about additional holdings of securities not previously revealed.

The bank's subprime portfolio fell to $27.6 billion (€18.85 billion) on December 31st from $29 billion on December 10th, when UBS issued a profits warning. But the bank yesterday unveiled a further $26.6 billion exposure to higher-rated paper, a $3.8 billion subprime-related reference-linked note programme and a $2.9 billion link to monoline insurers.

Separately, in commercial mortgage-backed securities, UBS held a combined $7.7 billion position via its trading book and loans.

Matt Spick of Deutsche Bank said: "We still think further writedowns are likely in at least the first quarter . . . raising the risk of market share losses."

The revelations came as the bank prepared investors for "another difficult year" after losses in fixed-income trading heavily outweighed earnings in private banking.

UBS reported a 4.38 billion Swiss franc (€2.73 million) net loss for 2007, and a SFr12.45 billion loss in the fourth quarter, when most writedowns were booked. By comparison, the bank made SFr12.26 billion after tax in 2006, and SFr3.41 billion in the last three months of that year.

UBS chief executive Marcel Rohner blamed the troubles on a "me-too strategy in fixed-income, predicated on closing gaps with our competitors", cheap liquidity from the group's private banking franchise and the creation of Dillon Read Capital Management, its now closed internal hedge fund.

He stressed action had been taken to reduce risk in fixed-income trading, the source of the group's subprime problems. There had also been improvements in controls and a sharper focus on business for clients, rather than for the bank's own book. The balance sheet had been reduced by about SFr200 billion, or 9 per cent, between the third and fourth quarters, and would be trimmed further.

Pretax losses at the investment bank amounted to SFr15.53 billion against pretax profits of SFr5.94 billion in 2006. Private banking prospered, with pretax earnings for global wealth management and business and retail banking in Switzerland climbing to SFr9.48 billion from SFr8.14 billion in 2006, while pretax profits in the fourth quarter hit a record SFr2.51 billion.

Net new money inflows were SFr156 billion, up 37 per cent on 2006.