Message-Id: <20071002053336.65BEA1B62C@rasa.iht.com>
Date: Tue, 2 Oct 2007 01:33:36 -0400 (EDT)
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Citigroup and UBS project poor earnings
By Eric Dash, Julia Werdigier and Mark Landler The New York Times
Monday, October 1, 2007
Two of the world's largest banks issued dire profit warnings for the third quarter on Monday, at least partly as a result of the recent turmoil in the mortgage markets.
Citigroup estimated a 60 percent drop in third-quarter earnings because of write-downs for securities backed by subprime mortgages and loans tied to corporate takeovers.
Separately, UBS, the biggest bank in Europe, predicted an unexpected loss in the third quarter because of a $3.42 billion write-down for the value of mortgage-backed securities, and announced a management shake-up.
UBS said it planned to cut 1,500 jobs and that Clive Standish, its chief financial officer, and Huw Jenkins, the head of its investment bank, were stepping down. The bank, based in Zurich, said its pretax loss for the three months through September was 600 million to 800 million Swiss francs, or $700 million to $930 million.
The loss, UBS's first in a quarter since 1998, when it had to write down its investment in Long-Term Capital Management, underscores the extent to which some of Europe's mightiest and most sophisticated financial institutions are exposed to investments that rest on shaky American mortgages.
Credit Suisse, UBS's Swiss archrival, reported that its profits had been hurt, too, but that it would still make a profit in the quarter. Now, investor scrutiny is turning to Deutsche Bank, which has yet to disclose write-downs, despite warning that it would not emerge from the turmoil unscathed.
Investors applauded UBS for its seeming candor, bidding up the bank's shares by more than 3.5 percent after they had slumped initially. Shares of Credit Suisse and Deutsche Bank also rose, reflecting what analysts said was a sense that the banks were starting to get a grip on their losses. (Page 20)
The Dow Jones industrial average rose to an all-time high, with gains in technology shares pushing the index to an intraday record of 14,096.25. It was the first time the index topped 14,000 since July.
The warnings come as other Wall Street firms have hinted they will face serious profit declines. Last month, Merrill Lynch warned that its third-quarter results would suffer, and Bank of America's financial chief said the turbulent markets would have a "meaningful impact" on third-quarter results. JPMorgan Chase has not publicly commented on its third-quarter results, but its executives have acknowledged tougher market conditions that are likely to have an effect.
Citigroup said it expected its third-quarter net income to fall to $2.2 billion from $5.51 billion a year earlier as it books losses on loans related to leveraged buyouts, weak fixed-income trading results and the deterioration of complex mortgage-backed securities that contained bad subprime loans. It also said its consumer business would be hurt by higher credit costs.
"Our expected third-quarter results are a clear disappointment," Charles Prince, the chief executive of Citigroup, said. "The decline in income was driven primarily by weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs."
"We expect to return to a normal earnings environment in the fourth quarter," Prince added.
Prince faces mounting pressure from investors because of Citigroup's sluggish stock price.
The announcement Monday, in fact, comes four years since Prince took over as chief executive from Sanford Weill. Citigroup's stock price was in the $47 to $49 range in October 2003; in late trading on Monday it up $1.29 at $47.96.
Citigroup said it expected to take a $1.9 billion pretax loss related to its fixed-income capital markets activities, which have been a cornerstone of its business ever since it absorbed the investment firm Salomon Brothers. About $1.3 billion of those losses involves the deterioration of mortgage-related securities, including collateralized debt obligations and other financial instruments containing bad subprime loans.
The results came as Merrill Lynch cut its third-quarter earnings estimate for Deutsche Bank, saying the bank would earn pretax profit of €7.1 billion, or $10.1 billion, next year, compared with its target of €8.4 billion, Bloomberg News reported.
The misadventure of UBS is typical of that of other European banks: expansion into sometimes exotic investments, which promised high yields and the comfort of triple-A credit ratings, followed by heavy losses, when the subprime crisis wiped out the market for the securities.
"They obviously took a huge bet," said Simon Adamson, a banking analyst at CreditSights, an independent research firm in London. "For a sophisticated investment bank, they did not take a view that is any different than the smaller regional banks that invested in these markets."
Marcel Rohner, who took over as chief executive of UBS in July after his predecessor was ousted over losses at the bank's in-house hedge fund, called the loss "unsatisfactory" and said that to "be as transparent as possible," he had taken "decisive action" and made appropriate senior management changes.
As part of the management changes, Rohner will take on the role of chairman and chief executive of the investment bank and Marco Suter, the bank's executive vice chairman, will become chief financial officer. Walter Stürzinger, the bank's chief risk officer, will become chief operating officer. UBS will report full third-quarter results on Oct. 30.
UBS shares closed up 3.04 percent Monday, at 64.50 Swiss francs. They had slumped as much as 4.3 percent in early trading in Zurich after the loss surprised analysts, who had expected the bank to remain profitable.
Eric Dash contributed from New York, Julia Werdigier from London and Mark Landler from Frankfurt.
<strong> U.K. raises savings coverage</strong>
Britain will raise depositors' protection on their savings to £35,000, or $71,000, the chancellor of the Exchequer, Alistair Darling, said, Reuters reported from London.
Under an industry-funded plan, the government will guarantee the first £2,000 of savings and then 90 percent of the next £33,000, for a maximum of £31,700.
Thousands of panicked savers had lined up to get their money from the British mortgage lender Northern Rock after it had to seek emergency funding from the Bank of England.
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