ZURICH — UBS AG is likely to dump more than $80 billion of toxic subprime securities into a separate unit, in an effort to distance itself from major losses in this area, refocussing attention on other, healthier areas of its business, according to analysts.
This so-called "bad bank" could be created by May 6, when the Zurich-based bank reports first-quarter results, analysts say. Its purpose would be to quarantine the $88 billion in risky assets that UBS still holds on its balance sheet, in a move analysts say would reassure investors and prop up the slumping share price.
"Initially, we would expect no impact on group earnings," Bear Stearns analyst Chris Wheeler wrote in a note to investors. "The creation of a 'bad bank' won't solve all UBS' problems. However, it could be an important step in aggressively dealing with issues it is facing" and make UBS' ongoing business easier to analyze. Wheeler rates UBS stock at peer perform.
Any losses related to the "bad bank" would still be reflected in UBS' final profit-and-loss statements, but by separating them from the bank's finance-based business, it would allow investors, analysts and ratings agencies to more easily evaluate progress in investment banking and private banking, the two main bank units.
UBS has been accused by analysts of being slow to disclose the full extent of its subprime and other mortgage losses, which totaled more than $18 billion in 2007, tipping the bank into an unprecedented net loss. UBS already said in February that it would place the securities in a separate book to be worked through, but didn't give details.
A separately managed, funded and reported book of securities is seen as allowing better management of assets being sold down.
UBS spokeswoman Larissa Alghisi declined to comment on the bank's plans for the securities.
These securities are typically backed by subprime mortgages, an area that has suffered massive losses after U.S. home defaults rose sharply. Losses from issuing and trading mortgage-securities has caused investment banks major pain, forcing several to seek fresh capital from foreign donors, with UBS the European bank worst hit.
Precedents for such a move are the Swedish government's Securum, created to deal with bad property bets, or the U.S. savings & loans bailout. While UBS' situation isn't nearly as dramatic, "the idea is to get out of the assets as soon as possible without crystalizing much of a loss," Standard & Poor's equity analyst Derek Chambers said.
The separation would also put more attention on UBS' highly profitable private bank, which has been overshadowed recently by the subprime hits, causing nervous clients to take flight. While UBS is well-capitalized after shareholders vetted a CHF13 billion ($12.62 billion) injection, signs are mounting that its private bank is suffering.
The stock has slumped 42% thus far this year, giving the bank a market capitalization of roughly $59 billion. The Dow Jones Stoxx 600 bank index has fallen 18% in the same period.
UBS made a similar move when it exited the private equity business, moving its investments there into a separate book while selling them down.
UBS isn't expected to sell down its holdings quickly or painlessly. "In terms of finding a structure to sell off ownership, under the circumstances I don't regard (a sale of the assets) as likely," S&P's Chambers said.
Last week, speculation that the bank had sold down its portfolio of Alt-A residential mortgage securities — one of the riskiest asset holdings — was shot down by U.S. fixed-income manager Pimco, which had been the rumored purchaser. Alt-A mortgages are issued to borrowers who aren't rated as low as subprime, but who, for example, lack full documentation of income or assets.
Analysts are expecting UBS to make between $11 billion and $20 billion of further write-downs for risky U.S. home loans, but it is unclear how much of that the bank will take in its first-quarter figures due in May.
