Published October 17, 2008
Swiss bailout for UBS dilutes GIC stake
By CONRAD TAN

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(SINGAPORE) Switzerland's government yesterday announced a sweeping rescue of its entire banking sector, including emergency cash infusions from the public purse for its biggest bank and a toxic-asset dump for removing troubled assets from banks' balance sheets.

Cash and cover: UBS has received a big cash injection and state backing for its soured debt securities
UBS, the country's biggest bank, received some US$60 billion in support from the Swiss government, comprising US$54 billion in state backing for the bank's soured debt securities, and a direct capital injection of six billion Swiss francs (S$7.86 billion). The move effectively dilutes the stakes of existing shareholders, including the Government of Singapore Investment Corp (GIC), which pumped 11 billion francs into UBS last December.
Credit Suisse, UBS' smaller rival, avoided a Swiss government bailout and instead raised 10 billion francs from other investors, with the biggest contribution from a unit of the Qatar Investment Authority.
The two largest Swiss banks also announced estimates of their third-quarter results, ahead of their scheduled earnings reports. UBS said it made a small net profit of 296 million francs - in line with its earlier guidance and reversing a net loss of 358 million francs in the second quarter. But the group suffered massive outflows of money as private banking customers and other clients withdrew funds or closed their accounts completely.
Its wealth management and business banking division continued to bleed badly, with net outflows of 49.3 billion francs for the three months to end-September, more than double the 19.3 billion francs recorded in the second quarter. Its global asset management division also saw net outflows of 34.4 billion francs, up from 24.5 billion in Q2.
'With today's measures, in addition to its earlier steps, UBS is confident that it has created the conditions necessary to reverse the outflow of client assets,' said the bank in a statement.
Credit Suisse expects a third-quarter net loss of about 1.3 billion francs compared to a Q2 profit of 1.2 billion francs - a result that is 'clearly disappointing', but 'understandable' given the turbulence in markets, said Brady Dougan, its chief executive.
Profits from its private banking business were dwarfed by losses from its investment banking division, which recorded a pretax loss of 3.2 billion francs, after suffering further writedowns of 2.4 billion francs. Its private banking business grew strongly, even as rival UBS faltered.
Credit Suisse said its wealth management division saw net inflows of 11 billion francs in new money during the quarter, while its Swiss corporate banking and retail banking business recorded net inflows of three billion francs.
Under yesterday's agreement, the Swiss government will buy six billion francs of mandatory convertible notes issued by UBS. That translates into a 9.3 per cent equity stake in the bank on conversion, which would make the Swiss government the biggest shareholder in UBS.
UBS will transfer as much as US$60 billion in mortgage-backed securities and other troubled assets to a special fund backed by the Swiss central bank, which has pledged to lend UBS up to 90 per cent or US$54 billion of the fund's value. That will reduce UBS's exposure to such assets to nearly zero, said Marcel Rohner, its chief executive. 'UBS has emphatically eliminated the issues that have been affecting it as a result of its exposure to US residential real estate securities and other illiquid risk assets,' he said.
'Our client businesses in Asia-Pacific continue to perform well,' said Rory Tapner, UBS Asia-Pacific chairman and chief executive.
'We applaud this move as it should relieve fears about further writedowns and eventually stem money outflows in its core wealth management franchise,' Pangiotis Spilopoulos, an analyst at banking group Vontobel, told Reuters in Zurich.
Kai Nargolwala, Credit Suisse's Asia-Pacific chief executive, told BT that a similar offer to offload soured assets into a state-backed fund and receive a capital infusion from the government was also offered to the bank, but it felt no need to take it up as it could still attract investments from other sources. 'The offer remains with us, but we don't see the necessity to do so.'
Yesterday, GIC said it welcomed the latest action by the Swiss government, which 'demonstrates the Swiss government's commitment to the stability of the Swiss financial system'.
'GIC is comfortable with our present investment in UBS,' said GIC, in response to questions from BT as to whether it would raise its stake in UBS, now diluted by the Swiss government's cash injection.