Thursday, Oct 16, 2008

(Adds detail, market comment.)

THE EVENT: The Swiss government finally moved to help out its ailing giant banks, taking a 9% stake in UBS AG (UBS) by pumping in 6 billion Swiss francs ($5.3 billion) of capital, while the Swiss National bank will purchase toxic assets worth up $60 billion from UBS. The government said it will also "moderately" improve on the current CHF30,000 protection for deposits at Swiss retail banks.

THE BACKGROUND: The move became necessary after an "unprecedented" meltdown in financial markets in recent days, and after the U.S. and other governments moved to shore up their banks, UBS Chief Executive Marcel Rohner said.

UBS was among the earliest and hardest hit European banks in the fallout from the U.S. subprime crisis. It wrote down around $42 billion in risky assets and was forced to launch two cash calls. Its shares have lost more than 50% since the beginning of the year.

Credit Suisse has overall fared better than its local rival, having written down about $8 billion of assets, but said Thursday it expects to make a net loss of around CHF1.3 billion in the third quarter.

GOVERNMENT INTERVENTION: The Swiss government doesn't intend to influence UBS through its shareholding and said it won't hang onto the stake long-term. Meanwhile, Swiss National Bank President Jean-Pierre Roth said Credit Suisse had rejected an offer of help in liquidating assets.

THE DETAILS:

*UBS: The finance ministry will subscribe to mandatory convertible notes by UBS worth $5.3 billion. The SNB will take a loan of up to $54 billion to finance a new fund that will take toxic assets worth up to $60 billion from UBS.

*CREDIT SUISSE: Separately, Credit Suisse said it had moved to raise its Tier 1 ratio to 13.7% by raising CHF10 billion ($8.7 billion) of new capital from a small group of investors. The largest investor in the group is Qatar Holding. The bank also ended a buyback program and said it is only accruing a nominal annual dividend.

Earnings: Both banks released earnings early. UBS reported a third-quarter net profit of CHF296 million.

Credit Suisse said it expects to post a CHF1.3 billion net loss for the third quarter because the market deteriorated further and it had to book further write-downs in its leveraged finance and structured products business. Its investment banking unit will post a CHF3.2 billion pretax loss, while private banking expects a pretax profit of CHF800 million.

MARKET REACTION: Shares in both banks opened more than 6% lower Thursday, mainly because of the dilutive impact of the capital increases on earnings-per-share, but came back as the session progressed. One strategist noted that while the measures are good for the stability of UBS, they come at a cost in terms of expensive foreign capital and EPS. At 0839 GMT, UBS shares were up 2% at CHF20.40, while Credit Suisse was up 1.7% at CHF46.66.

Vontobel analysts said the Credit Suisse capital increase and predicted third-quarter net loss was bad news as it contrasts with recent reassurances.

WHAT THEY SAID: "We are very pleased to have reached a solution that further strengthens our capital base and ensures our competitive position. Credit Suisse is very strongly capitalized and these measures mean that we immediately exceed the revised regulatory requirement for 2013." - Credit Suisse CEO Brady W. Dougan.

"In these turbulent times we want to ensure that we do everything possible to safeguard the solidity of our bank. We are taking practical steps to eliminate legacy risks." - UBS Chairman Peter Kurer.

The Government of Singapore Investment Corp. said that its 9% stake in UBS will be slightly diluted by the CHF6 billion government cash injection, but added: "GIC welcomes the action taken by the Swiss government and views this as a positive development. It demonstrates the Swiss government's commitment to the stability of the Swiss financial system. GIC explores all investment opportunities that are made available."

MARKET COMMENT: Helvea analyst Peter Thorne said UBS might have been able to avoid Swiss government intervention, but has "obviously gone for safety first," in transferring assets to the Swiss National Bank. "Frankly, to get rid of all toxic assets for what I calculate to be 10% dilution is quite a good trade I think, and one most banks around the world would give their right hand for."

-By Steve McGrath, Dow Jones Newswires; 44-20-7842-9284; steve.mcgrath@dowjones.com

(Costas Paris, Martin Gelnar, Hans Schoemaker, and Katherina Bart in Zurich contributed to this article.)

(END) Dow Jones Newswires

16-10-08 0855GMT