SWITZERLAND'S TOP BANKS FACE CONTINUING STRAIN

UNCLAS BERN 000073

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV SZ
SUBJECT: SWITZERLAND'S TOP BANKS FACE CONTINUING STRAIN


1. Switzerland's leading banks, UBS and CreditSuisse,
reported record-breaking losses in the fourth quarter of
2008, highlighting the continuing financial strain on
Switzerland's banking industry. UBS and CreditSuisse
announced 2008 annual losses of 17.1 billion USD and 7.1
billion USD, respectively. Despite these massive losses, the
banks maintain a positive outlook with an expectation of
profits in 2009. However there is skepticism that UBS,
facing client distrust and potential legal fines from the
U.S., will pull so rapidly from the financial crisis. Public
and media backlash against fat cat bonuses hit an all time
high when UBS announced it would pay 2 billion in bonuses
despite receiving state aid.

BANKS REPORT MAJOR LOSSES
--------------


2. Switzerland's leading banks reported worse-than-expected
losses in the fourth quarter of 2008, highlighting the
continuing financial strain on Switzerland's banking
industry. UBS, Switzerland's largest bank and the world's
leading wealth manager, announced a fourth quarter net loss
of 8.1 billion Sfr (7 billion USD) totaling a 2008 annual
loss of 19.7 billion Sfr (17.1 billion USD); the largest
annual loss in the history of Swiss banking. CreditSuisse,
Switzerland's second largest bank, trailed behind with 6.0
billion Sfr (5.2 billion USD) for the fourth quarter and
full-year 2008 losses of 8.2 billion Sfr (7.1 billion USD).


3. UBS' financial woes are spreading from its investment
banking division, once an isolated injury from toxic asset
write-offs, to its wealth management division. UBS' need for
government infused funding of 60 billion Sfr and the ongoing
investigation by the U.S. over claims of aiding tax evasion
have done little to build or maintain client trust with
clients reportedly pulling 58.2 billion Sfr (50.6 billion
USD) (about 2 percent of total assets) from UBS' wealth
management division in the fourth quarter.

BANKS CAUTIOUS BUT UPBEAT ABOUT 2009
--------------


4. Despite massive losses, UBS reported an "encouraging
start to the year" with net new money in January and pointed
to a strong capital ratio for 2008 year-end of 11.5 percent
and a total capital adequacy ratio of 15.5 percent (largely
assisted by a government rescue package). UBS stated that
its "near-term outlook remains cautious" and that it intends
to further reduce its risk position, risk weighted assets and
operating costs. UBS will continue to implement its new
strategy of dividing wealth management into two new divisions
and restructuring from an integrated approach to refocus on
Swiss core businesses.


5. CreditSuisse reported on February 11 "a strong start to
2009 and was profitable across all division year to date." It
reported "one of the strongest capital ratios in the
industry" at 13.3 percent for year-end 2008. The overall
risk in investment banking was reduced in 2008 leading to a
"significantly lower risk profile." CreditSuisse CEO Brady
Dougan expanded on the positive outlook by stating, "We have
positioned our businesses to be less susceptible to negative
market trends if they persist in the coming months and to
prosper when markets recover." CreditSuisse remains
committed to an integrated business model, citing
collaboration through its three businesses (investment
banking, asset management, and private banking) as a source
of stable, high-margin revenues.

PAYMENT OF BONUSES PROVOKES PUBLIC OUTCRY
--------------


6. Scathing press comments and public backlash followed UBS'
announcement that it would pay out 2 billion Sfr (1.77
billion USD) in bonuses for 2008. The media quoted numerous
politicians and pundits calling the bonuses inexplicable and
incomprehensible when UBS reported huge 2008 losses and was
rescued by state funds. Switzerland's financial regulator,
FINMA, which approved the bonus payment, has also been
questioned for its decision. UBS originally asked for 3
billion Sfr in bonuses, which was reduced by FINMA. The
media and public openly dismissed the grounds given for
defending the bonuses such as the fact that all UBS employees
are not investment bankers; many had profitable portfolios;
the banking compensation structure is based on bonus
payments; and that bonuses are needed to retain employees.


7. CreditSuisse, which designed a creative bonus structure
for 2008, was better received. The bank has issued a portion
of its distressed assets as bonuses transferring the risk of
further losses to the employees while reducing the bank's
exposure. However, some critics argue that given
CreditSuisse's losses no bonuses should be paid at all.
Others argued that the converted assets should have been
handed over at the original value, not marked down to 2008
year-end value.

COMMENT
--------------


8. Although both banks provide a positive outlook for 2009,
there remains considerable uncertainty as to whether these
expectations will prove accurate. UBS and CreditSuisse
assured clientele throughout 2008 that conditions would
improve, major write-offs were completed, and that further
capital infusions would not be necessary. However, all of
these assurances proved inaccurate.
CARTER