UBS writedown foreshadows more pain for banks

ZURICH (Reuters) - UBS's shock $10 billion writedown on subprime exposure warns of more pain to come for U.S. and European banks but none seems set to follow UBS and call on Asian or Middle East investors to shore up its balance sheet.

After advising for weeks there were no huge charges on the horizon, UBS stunned the market on Monday with the massive writedown, saying it had obtained a 13 billion Swiss franc ($11.52 billion) capital injection from the Singapore government and an unnamed Middle East investor.

"Everyone assumes there is more to come from other banks but UBS was seen by investors as being behind the curve," said a London-based analyst with a major British bank who asked not to be identified.

UBS's move puts pressure on other banks, especially those with large investment banking operations, to clear up any remaining overhang from the meltdown in U.S. subprime mortgages - loans made to borrowers with poor credit histories.

The subprime debacle has triggered a global credit crisis as banks sift through their portfolios of mortgage-backed securities and take charges on any exposures that have been contaminated by subprime borrowers defaulting on loans.

"The lesson is that investment banks will do it all in the fourth quarter," said the British bank analyst, who said he expected Citigroup (C.N) and Merrill Lynch MER.N to face the heaviest writedowns.

Royal Bank of Scotland (RBS.L), Britain's second-biggest bank, was the last of Britain's major banks to unveil a writedown, last week saying it would make a smaller-than-expected $2.5 billion charge.

The Dow Jones European banking Stoxx index .SX7P was up 1.12 percent at 6:15 a.m. EST as investors took heart from UBS's decision to end weeks of mounting uncertainty about likely fourth-quarter charges.

"The optimists would say the quicker it's out, the quicker it gets digested and life moves on," said David Bowers, at Absolute Strategy in London. "It's better than a bank denying it has a problem in the first place."

Although many Western banks on both sides of the Atlantic have taken a total of tens of billions of dollars in writedowns on their subprime-related exposures, UBS is only the second global bank after Citigroup (C.N) to seek an emergency capital injection from a cash-rich sovereign wealth fund.

The Abu Dhabi Investment Authority invested $7.5 billion in Citigroup last month after the U.S. bank unveiled huge subprime-linked charges.

"I think this is largely UBS-specific. No one has got themselves into this as deeply as they did," said a banking analyst with a U.S. investment bank in London.

"But it is a reminder that several other European banks may need to top up their charges in the fourth quarter, although there should be nothing that would generate such a hit to the capital base that they would need to recapitalize," he said.

UBS said the capital injection would enable it to raise its tier 1 capital ratio to 12 percent, despite the hefty writedown of its exposures.

Without the recapitalization, the $10 billion charge would have blown a hole in its capital base.

Analysts say it is crucial for UBS to keep its Tier 1 capital in double figures in order to secure its franchise as the world's largest wealth manager.

Banks such as Fortis, Societe Generale (SOGN.PA) and Dexia DEXI.PA were likely to have to make additional writedowns, the analyst said.

"UBS' writedowns are large, but conservative, and it has managed to find investors to take the risks," analysts at Dresdner Kleinwort said in a note to clients on Monday.

"However, smaller groups may not have this luxury and there is clear evidence of balance sheet stress emerging."

(Editing by David Cowell)