Crisis bites Citigroup and Swiss banks

By Andrew Hurst and Christian Plumb

ZURICH/NEW YORK (Reuters) - The credit crisis struck at the heart of global finance on Monday as Swiss bank UBS AG (UBSN.VX) said it faced a shocking loss in the third quarter and Citigroup (C.N) warned its profits were in a steep slide.

UBS's chief domestic rival Credit Suisse Group (CSGN.VX) also said its third quarter results would be "adversely impacted" by the credit market turmoil, but said it would remain profitable in the third quarter.

The announcements are the latest from a lengthening queue of banks that have taken hits from the meltdown in U.S. subprime mortgages, which has set off a global liquidity crisis.

UBS said it would write down a net 4 billion Swiss francs ($3.4 billion) in its fixed-income portfolio and elsewhere, resulting in a third-quarter loss of 600 million francs to 800 million francs, its first quarterly loss in nine years.

UBS also said it would shed 1,500 jobs in its investment bank -- a sharp reversal of its recent buildup.

Citigroup, the world's largest bank by market value, said it was expecting a fall of about 60 percent in third-quarter earnings on $5.9 billion in losses and write-downs from subprime and leveraged loans, fixed income trading, as well as weakness in its consumer business.

Among the main culprits for the profit warning were $1.4 billion in pretax write-downs on funded and unfunded leveraged loan commitments.

Citi also said it was taking $1.3 billion in pretax losses on the value of subprime mortgage-backed securities it had "warehoused" -- held temporarily on its books -- to repackage into bonds called collateralized debt obligations (CDOs).

A ONE-TIME ISSUE?

Despite what looked like negative news from both banks, their shares rallied amid a broader stock market surge driven by what analysts said was a perception the worst had past for financials.

"I think the market's taking their comments ... as a signal that this is a one time issue and that we're beyond the credit market problems," said Keith Davis, a research analyst at fund manager Farr, Miller & Washington, adding he was unconvinced the worse was over for U.S. banks.

Charles Prince, Citi's embattled chief executive, said he expected the bank "to return to a normal earnings environment in the fourth quarter."

And he said the bank's fixed income trading business, which suffered $600 million in losses in the quarter, performed "at more normalized levels" in September.

Citi shares rose 2.3 percent, UBS shares rose 3 percent and Credit Suisse stock gained 1.8 percent as investors overlooked the scale of the impact and welcomed the banks' efforts to be transparent about their exposure.

The shares of Deutsche Bank AG (DBKGn.DE), which has warned it will suffer a hit from the market turmoil in the third quarter, but has not yet quantified the scale of the likely damage, gained 0.9 percent.