Crisis bites Citigroup and Swiss banks

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.

Lending among banks worldwide has seized up as financial institutions try to work out the extent of their exposure to subprime mortgages, which were packaged into asset-backed securities and parceled out to investors around the globe.

The world's main central banks have been keeping the financial system afloat by pumping in huge amounts of liquidity.

SUBPRIME CRISIS

Investors had been preparing for bad news from UBS, which is due to report its third quarter results in November, after the bank ran up reported losses at its hedge fund, Dillon Read Capital Management (DRCM).

UBS was one of the earliest casualties of the subprime crisis when it announced in May it was shutting down its DRCM unit after it was hit by losses. In July, it replaced CEO Peter Wuffli with Marcel Rohner -- a decision most industry analysts believe was a direct consequence of the Dillon Read fiasco.

Rohner said on Monday he was removing top managers to accelerate a transformation in the investment bank, but downplayed speculation UBS would seek to split the group into its two main units: investment banking and wealth management.

Investment bank head Huw Jenkins, who drove a rapid expansion in UBS's bid to join the top five investment banks worldwide, will leave along with Group Chief Financial Officer Clive Standish.

Citi and UBS's warning followed profit reports at major Wall Street banks such as Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc LEH.N, which beat expectations.

Unlike at UBS, Citi's write-downs and losses, which totaled $5.9 billion, did not result in any kind of boardroom shake-up , but some investors and analysts renewed calls for Prince to quit.

His survival may depend on how accurate his forecast about a smoother earnings road in the fourth quarter turns out to be.

(Additional reporting by Thomas Atkins in Zurich))