New York, November 18, 2009 -- Moody's Investors Service today downgraded the bank financial strength
rating (BFSR) and the long-term debt and deposit ratings of UBS
AG. The BFSR was lowered to C from B-, corresponding
to a change in the bank's unsupported baseline credit assessment
(BCA) to A3 from A1. The ratings for deposits and senior debt were
lowered to Aa3 from Aa2, while the ratings for senior subordinated
debt were lowered to A1 from Aa3. The bank's Prime-1
short-term ratings were affirmed.
Moody's also downgraded the ratings of UBS's non-cumulative
trust preferred stock and Tier 1 capital securities to Baa3 from A1.
This action incorporated both the BFSR downgrade and Moody's revised
methodology for rating bank hybrid securities. The outlook for
all of UBS's ratings is negative.
BFSR DOWNGRADE DUE TO SIGNIFICANT CHALLENGES
The two-notch downgrade of UBS AG's BFSR reflects Moody's
view of the considerable challenges that UBS continues to face in both
its Investment Banking and Wealth Management businesses. The bank
has suffered a loss of customer confidence, as demonstrated by the
ongoing net new money outflows in wealth management, and a loss
of key employees, as demonstrated by the loss of revenues in investment
banking, especially in fixed income. While both of these
areas are beginning to show early signs of a turnaround, Moody's
believes these challenges are unlikely to be short-lived.
Moody's views UBS's leading Wealth Management franchise as
a critical underpinning of its overall financial strength. However,
this business has suffered a serious erosion of customer confidence,
suffering net new money outflows for seven consecutive quarters.
The net outflows have further pressured profit levels that were already
under pressure from lower asset values, subdued client activity,
and declining net interest margins. "We believe that UBS's
wealth management franchise is unlikely to return to previous levels of
profitability until the bank can fully restore customer confidence,"
said David Fanger, Moody's Senior Vice President. "But
we expect that restoring customer confidence will take some time,
in light of customer sensitivity both to the bank's own difficulties
and lack of profitability and to potential further challenges to Swiss
bank secrecy," Mr. Fanger added. The rating
agency expects that such challenges are likely to be a continuing part
of the private banking landscape for a while, as deficit-burdened
countries strengthen their tax collection efforts.
The ratings downgrade incorporates Moody's assumption that net new
money flows in Wealth Management will turn positive by the middle of 2010,
but that margins are unlikely to expand significantly given the need to
improve customer confidence. Nonetheless, the rating agency
also assumes that pre-tax margins in Wealth Management & Swiss
Bank will remain above 25%, and that the overall revenue
yield (gross margin) will remain above 100bps.
In Investment Banking, although UBS has sold a considerable portion
($39 billion) of its legacy exposures to the Swiss National Bank
(SNB), it remains exposed to potential additional losses on its
remaining legacy exposures, most notably in its exposures to the
monoline financial guarantors. In addition, in Moody's
opinion the bank appears to have benefited less than many of its peers
from the recent improvement in trading margins and volumes among more
liquid capital markets instruments. "The bank has also experienced
a significant turnover of senior managers over the past two years,
which gives us some concerns about the continuity and effectiveness of
management," Mr. Fanger added.
In response to this, the bank embarked on a significant hiring (and
re-hiring) effort in its fixed income division this summer,
and in the third quarter demonstrated some improvement in revenues in
that area. However, Moody's notes that during the quarter
the bank also had higher accruals for performance-based compensation
and salary increases. "We believe the increase in accruals
reflects the pressures UBS is under to pay personnel at rates that are
competitive with peers, even though its year-to-date
capital markets revenue performance has lagged its peers,"
Mr. Fanger noted.
The rating agency added that it believes the pressure on compensation
in Investment Banking poses additional challenges for UBS, and could
lead to additional risk taking. The bank has made several changes
to its risk management governance, including the creation of a dedicated
risk committee at board level, as well as to staffing and processes.
"However, in our opinion the success of this initiative cannot
be taken for granted," said Mr. Fanger. In particular,
the initiative requires a change in risk culture and a support from the
top of the organization, including in terms of resources deployed
to the risk function.
Moody's noted that UBS is not alone in facing risk management challenges.
The financial crisis revealed that very few investment banking firms have
a true culture of risk management that will not be compromised when competition
heats up, regulatory pressure abates, or management changes.
"The challenges to successfully implementing such a culture are
not to be underestimated," Mr. Fanger noted.
"In this perspective UBS's recently announced increase in
risk taking at the Investment Bank is of some concern."
The negative outlook on the BFSR reflects the risk to creditors if the
bank is unable to restore customer confidence and improve net new money
flows in Wealth Management, or is unable to restore profitability
in its Investment Bank business without increasing its risk profile.
While the bank's strong capital position and still leading market
share in certain key franchises provides substantial support to its current
ratings, over the near term Moody's still sees more downside
risks than upside.
DEPOSITS AND SENIOR DEBT BENEFIT FROM SYSTEMIC SUPPORT
While UBS's standalone BFSR was lowered by two notches, Moody's
downgraded the bank's ratings for deposits and senior debt by only
one notch, to Aa3 from Aa2. "Given UBS's importance
to the Swiss economy and financial system, we continue to see a
very high probability that UBS would receive further systemic support
if it should be required," said Mr. Fanger.
This results in three notches of uplift from the bank's BCA of A3 to the
Aa3 rating for long-term deposit and senior debt.
The negative outlook on the deposit and senior debt ratings reflects Moody's
view that if additional systemic support were required, it could
potentially result in a transforming event such as a breakup or sale which
could threaten the bank's franchise value. "While we
think the need for any additional support to be unlikely, we believe
that were UBS to require additional support, the Swiss authorities
might consider taking action to further shrink the bank so as to reduce
the government's contingent liability," Mr. Fanger
said. "Therefore, because we have a negative outlook
on the bank financial strength rating, we have decided to also place
a negative outlook on the deposit and senior debt ratings."
Were the bank financial strength rating to decline further, Moody's
expects that the deposit and senior debt ratings could also decline.
LOWER BFSR, REVISED METHODOLGY DRIVE HYBRID RATINGS
Moody's downgrade of the ratings on UBS's non-cumulative
trust preferred stock and Tier 1 capital securities incorporate today's
downgrade of the company's BFSR as well as the rating agency's
revised methodology for rating bank hybrid capital securities.
(See "Moody's Guidelines for Rating Bank Hybrid Securities
and Subordinated Debt," November 2009, for more details.)
Under the revised methodology, Moody's is removing any ratings
benefit due to systemic support for such instruments. The combined
effect of removing this support, together with the two-notch
downgrade of the bank's BFSR (resulting in an A3 baseline credit
assessment) led the rating agency to downgrade those securities to Baa3.
PREVIOUS RATING ACTION AND RATING METHODOLOGY
Moody's previous rating action on UBS AG was on 15 June 2009 when
Moody's placed the bank's long-term ratings on review
for possible downgrade.
The principal methodologies used in rating this issuer were "Bank Financial
Strength Ratings: Global Methodology" published in February 2007,
and "Incorporation of Joint-Default Analysis into Moody's Bank
Ratings: A Refined Methodology" published in March 2007 and available
on www.moodys.com in the Ratings Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Ratings Methodologies sub-directory on Moody's
website.
UBS AG is headquartered in Zurich, Switzerland. At the end
of September 2009, UBS reported total consolidated assets of CHF
1,476 billion. For the first nine months of 2009, UBS
reported a net after-tax loss attributable to shareholders of CHF
-3,941 million.
Downgrades:
..Issuer: Edelweiss Master Trust
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: Swiss Bank Corporation
....Subordinate Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: Swiss Bank Corporation, New York Branch
....Subordinate Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: UBS AG
....Bank Financial Strength Rating,
Downgraded to C from B-
....Issuer Rating, Downgraded to Aa3
from Aa2
....Multiple Seniority Deposit Program,
Downgraded to Aa3, A1 from Aa2, Aa3
....Multiple Seniority Medium-Term
Note Program, Downgraded to Aa3, A1 from Aa2, Aa3
....Subordinate Regular Bond/Debenture,
Downgraded to A1 from Aa3
....Senior Unsecured Medium-Term Note
Program, Downgraded to Aa3 from Aa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to a range of (P)Aa3 to Aa3 from a range of (P)Aa2 to Aa2
....Senior Unsecured Deposit Rating,
Downgraded to Aa3 from Aa2
....Senior Unsecured Shelf, Downgraded
to (P)Aa3 from (P)Aa2
..Issuer: UBS AG, Australian Branch
....Multiple Seniority Medium-Term
Note Program, Downgraded to Aa3, A1 from Aa2, Aa3
..Issuer: UBS AG, Jersey Branch
....Multiple Seniority Medium-Term
Note Program, Downgraded to Aa3, A1 from Aa2, Aa3
....Subordinate Regular Bond/Debenture,
Downgraded to A1 from Aa3
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to Aa3 from Aa2
....Senior Unsecured Medium-Term Note
Program, Downgraded to Aa3 from Aa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to a range of (P)Aa3 to Aa3 from a range of (P)Aa2 to Aa2
....Senior Unsecured Shelf, Downgraded
to (P)Aa3 from (P)Aa2
..Issuer: UBS AG, London Branch
....Multiple Seniority Medium-Term
Note Program, Downgraded to Aa3, A1 from Aa2, Aa3
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to Aa3 from Aa2
....Senior Unsecured Medium-Term Note
Program, Downgraded to Aa3 from Aa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: UBS AG, New York Branch
....Multiple Seniority Deposit Program,
Downgraded to Aa3, A1 from Aa2, Aa3
....Multiple Seniority Medium-Term
Note Program, Downgraded to Aa3, A1 from Aa2, Aa3
..Issuer: UBS AG, Stamford Branch
....Multiple Seniority Deposit Program,
Downgraded to Aa3, A1 from Aa2, Aa3
....Multiple Seniority Medium-Term
Note Program, Downgraded to Aa3, A1 from Aa2, Aa3
....Subordinate Regular Bond/Debenture,
Downgraded to A1 from Aa3
....Senior Unsecured Deposit Note/Takedown,
Downgraded to Aa3 from Aa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: UBS Americas, Inc.
....Issuer Rating, Downgraded to Aa3
from Aa2
....Multiple Seniority Medium-Term
Note Program, Downgraded to a range of A1 to Aa3 from a range of
Aa3 to Aa2
....Multiple Seniority Shelf, Downgraded
to (P)Aa3, (P)A1 from (P)Aa2, (P)Aa3
....Multiple Seniority Shelf, Downgraded
to (P)Aa3, (P)A1, (P)Baa1 from (P)Aa2, (P)Aa3,
(P)Aa3
....Multiple Seniority Shelf, Downgraded
to (P)Aa3, (P)A1, (P)Baa1 from (P)Aa2, (P)Aa3,
(P)Aa3
....Subordinate Medium-Term Note Program,
Downgraded to A1 from Aa3
....Senior Unsecured Medium-Term Note
Program, Downgraded to Aa3 from Aa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
....Senior Unsecured Shelf, Downgraded
to (P)Aa3 from (P)Aa2
..Issuer: UBS Capital Securities (Jersey) LTD
....Preferred Stock Preferred Stock,
Downgraded to Baa3 from A1
..Issuer: UBS Finance (Curacao) N.V.
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: UBS Finance (Delaware), LLC.
....Senior Unsecured Medium-Term Note
Program, Downgraded to Aa3 from Aa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
..Issuer: UBS Limited
....Issuer Rating, Downgraded to Aa3
from Aa2
..Issuer: UBS Loan Finance LLC
....Issuer Rating, Downgraded to A3
from A1
..Issuer: UBS Preferred Funding (Jersey) Ltd.
....Preferred Stock Preferred Stock,
Downgraded to Baa3 from A1
..Issuer: UBS Preferred Funding Co. LLC VII
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Company LLC I
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Company LLC II
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Company LLC IV
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Company LLC IX
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Company LLC V
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Company LLC VI
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Company LLC VIII
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Trust I
....Preferred Stock Preferred Stock,
Downgraded to Baa3 from A1
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Trust II
....Preferred Stock Preferred Stock,
Downgraded to Baa3 from A1
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Trust IV
....Preferred Stock Preferred Stock,
Downgraded to Baa3 from A1
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Trust IX
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Trust V
....Preferred Stock Preferred Stock,
Downgraded to Baa3 from A1
..Issuer: UBS Preferred Funding Trust VI
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Trust VII
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: UBS Preferred Funding Trust VIII
....Preferred Stock Shelf, Downgraded
to (P)Baa3 from (P)A1
..Issuer: Union Bank of Switzerland
....Subordinate Regular Bond/Debenture,
Downgraded to A1 from Aa3
Outlook Actions:
..Issuer: Edelweiss Master Trust
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS AG
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS AG, Australian Branch
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS AG, Jersey Branch
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS AG, London Branch
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS AG, New York Branch
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS AG, Stamford Branch
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Americas, Inc.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Capital Securities (Jersey) LTD
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Finance (Curacao) N.V.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Finance (Delaware), LLC.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Limited
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Loan Finance LLC
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding (Jersey) Ltd.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Co. LLC VII
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Company LLC I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Company LLC II
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Company LLC IV
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Company LLC IX
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Company LLC V
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Company LLC VI
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Company LLC VIII
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust I
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust II
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust IV
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust IX
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust V
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust VI
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust VII
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: UBS Preferred Funding Trust VIII
....Outlook, Changed To Negative From
Rating Under Review
New York
David Fanger
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades UBS (Senior to Aa3 from Aa2), Outlook negative
