September 16, 2011 / 10:45 AM / 8 years ago

TEXT-Fitch places UBS's viability rating on rating watch negative

(The following statement was released by the rating agency)

Sept 16- Fitch Ratings has placed UBS AG’s (UBS) Viability Rating (VR) of ‘a-‘ on Rating Watch Negative (RWN). At the same time, Fitch has affirmed UBS’s Long-term Issuer Default Rating (IDR) at ‘A+’, Short-term IDR at ‘F1+’, Support Rating at ‘1’ and Support Rating Floor at ‘A+’. The Outlook on the Long-term IDR is Stable. A full list of ratings actions is at the end of this comment.

This rating action follows the announcement by UBS that it had discovered a loss due to unauthorised trading in its investment bank in the range of USD2bn. In Fitch’s opinion, the sizeable trading loss represents a significant set-back in UBS’ attempt to restore its investment banking (IB) franchise. The RWN on UBS’s VR largely reflects concerns about what this loss may signal for UBS’s risk control capacity, the strategic positioning of its investment bank and - in the medium-term - potential repercussions this incident could have on UBS’s recently recovered wealth management franchise.

As a result, a net loss for the bank in Q311 is a possibility, according to the bank. However, the agency expects UBS to remain profitable for the full-year 2011 and the direct financial implications of this incident are therefore likely to be manageable. The bank’s IDRs remain based on Fitch’s expectation of the availability of sovereign support from the Swiss authorities.

Fitch will resolve its RWN once it has obtained more detailed information about the incident, in particular about the robustness and responsiveness of UBS’s recently revised risk control framework in IB. Fitch acknowledges that no control framework can fully protect a bank from a “rogue” trader. However, the magnitude of the loss is large in the context of UBS’s reduced IB activities and compared to other “rogue trader” incidents at other institutions. It also exemplifies the inherently higher risks investment banks can face.

Ever since UBS received government support in 2008, the appropriate size and role of its IB activities has been one of the bank’s main issues. This incident strengthens the arguments for UBS to down-scale its IB unit, to essentially provide ancillary services for UBS’ core wealth management franchise. Fitch has repeatedly stated that better risk-adjusted returns and a clearer strategy for its IB unit would be important in strengthening UBS’s VR.

In Fitch’s view, apart from damaging its IB franchise, the announced trading loss could also have negative repercussions for UBS’s wealth management activities. It took the bank several years to revert the net new money (NNM) outflows since 2008. If this incident unsettles wealth management clients and leads to renewed NNM outflows, this would put significant downward pressure on UBS’s VR.

More generally, the event is likely to affect the ongoing debate about the “Too Big Too Fail” legislation in the Swiss parliament. Following this, Fitch expects parliamentarians to be considerably less inclined to accommodate banks’ requests to loosen some of the relatively strict revised liquidity, capital and organisational requirements imposed by the draft legislation.

UBS is a leading global provider of wealth management, one of the world’s largest trading/investment banks and the largest domestic bank in Switzerland.

In Fitch’s rating criteria, a bank’s standalone risk is reflected in Fitch’s Viability ratings and the prospect of external support is reflected in Fitch’s Support Ratings. Collectively these ratings drive Fitch’s long- and short-term IDRs.

The rating actions are as follows:

UBS AG:

Long-term IDR: affirmed at ‘A+’; Outlook Stable

Short-term IDR: affirmed at ‘F1+’

Viability Rating of ‘a-‘: placed on RWN

Individual Rating of ‘B/C’: placed on RWN

Support Rating: affirmed at ‘1’

Support Rating Floor: affirmed at ‘A+’

Senior unsecured debt: affirmed at ‘A+’

Subordinated debt: affirmed at ‘A’

Commercial paper and Short-term debt: affirmed at ‘F1+’

Market linked securities: affirmed at ‘A+’emr’

UBS Limited:

Long-term IDR: affirmed at ‘A+’; Outlook Stable

Short-term IDR: affirmed at ‘F1+’

Support Rating: affirmed at ‘1’

UBS Preferred Funding Trust V Preferred Securities: ‘BBB-‘ placed on RWN

UBS Preferred Funding Trust (Jersey) Limited Preferred Securities: ‘BBB-‘ placed on RWN

UBS Capital Securities (Jersey) Limited Preferred Securities: ‘BBB-‘ placed on RWN ()

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