Moody's Investors Service has cut various ratings on
UBS AG (
UBS) pointing out the significant challenges the company continues to face in its Investment Banking and Wealth Management businesses.
Moody's has downgraded the bank financial strength rating and the long-term debt and deposit ratings of UBS AG. The bank financial strength rating was lowered two notches to C from B-, while its deposits and senior debt ratings were lowered to Aa3 from Aa2. The ratings for senior subordinated debt were slashed to A1 from Aa3. The outlook for all ratings is negative implying that further downgrades are possible over the next 12 to 18 months.
Moody’s has expressed its concern over the loss of customer confidence, which is reflected by the ongoing net fund money outflows in the wealth management business. Also a number of key employees have left the organization that resulted in a significant decline in the revenues of the investment banking division, particularly in the fixed income business. Though some early signs of recovery are being noticed, Moody’s believes that the current challenges will prolong.
Moody’s also suspect that the investment banking division may suffer more losses from its exposure to bond insurers. Relative to its peers, the company has benefited less from the recent rebound in trading margins and capital market volumes.
Swiss banks have enjoyed large foreign deposit inflows over the years as a result of the country’s tax system, which emphasizes extreme secrecy. However, the adoption of the Organization for Economic Co-operation and Development standards for tax cooperation coupled with the US Internal Revenue Service’s lawsuit against UBS has led to dilution of secrecy. The company is experiencing large fund outflows as worried investors are eyeing a safer refuge.
UBS’s third quarter results were disappointing as the company reported its fourth consecutive quarterly loss. The ongoing global economic turmoil has severely hurt the Swiss banking major’s balance sheet when the subprime crisis led to record losses. In particular, the investment banking arm of UBS experienced large trading losses. The company had to take a financial aid package from the Swiss government. In addition, the issues emanating from the dilution of Swiss banking secrecy will significantly challenge the company’s return to profitability.
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