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Rating Action:

Moody's downgrades UBS' financial strength rating to B+ from A- and affirms Aaa debt and deposit ratings

30 Nov 2007
Moody's downgrades UBS' financial strength rating to B+ from A- and affirms Aaa debt and deposit ratings

London, 30 November 2007 -- Moody's Investors Service today downgraded from A- to B+ Bank Financial Strength Rating (BFSR) of UBS AG and affirmed the Aaa senior debt and deposit ratings as well as all other ratings of UBS AG. The Aa1 ratings of UBS Deutschland and UBS Loan Finance, which are linked to the BFSR of UBS AG, were downgraded to Aa2 in line with the downgrade of the BFSR of UBS AG. The ratings on all other subsidiaries were affirmed. The outlook on all of the above ratings is stable.

The downgrade of the BFSR reflects Moody's view that UBS' subprime related exposures have a large loss content -- some of which has been recognised to date - which negatively impacts the bank's earnings stability and our understanding of the quality of their risk management. Nevertheless, we consider the exposures to be manageable within the bank's strong earnings capacity and high capital levels.

UBS announced on 30th October that it had a significant net exposure of USD39bn to subprime-related securities at the end of September 2007, with positions of USD20.2bn in super senior CDOs, USD16.8bn in residential mortgage-backed securities and USD1.8bn in CDO warehouse/ retained. The gross positions and hedges have not been disclosed, but writedowns taken on the positions in the Q307 were USD4.4bn. Moody's takes into account the difficulty of generalising about levels of writedowns of structured securities at different banks, given the impact of many specific factors, such as vintage, amount of subprime collateral, and capital structure. However, given the ongoing deterioration in the performance of the subprime collateral backing the CDOs, we expect the bank will likely need to take further meaningful writedowns on this portfolio. We have noted that UBS is marking its super senior CDOs to model and this can currently lead to a lower level of markdowns than at banks which are referencing similar securities to the relevant ABX indices.

The rating agency commented that UBS' Tier 1 ratio at the end of September 2007 was 10.6%, which is a very high ratio compared to peers. In fact, the Tier 1 ratio had come down from a higher level of 12.3% at the end of June 2007, but the reduction was attributable to a number of different items, of which the Q3 loss and additional RWA only accounted for 0.6%. In conducting its own stress tests, Moody's has concluded that the bank would be able to absorb writedowns several times the size of the recently announced writedowns without significantly weakening its capital base, although such writedowns would clearly impact the bank's profitability. The bank has a number of tools to manage its capital base, including a reduction in share buyback activity, lowering dividends and reducing risk-weighted assets.

Progress in the bank's risk management will continue to be an important rating driver for the bank. As indicated in our press release of October 2nd 2007, the size of the subprime exposure at UBS indicates the build up of a large concentration in a single asset class which goes beyond our understanding of the firm's risk appetite and potential issues with the effectiveness of their hedging strategies. Therefore, we will continue to engage with management to understand their proposals to refine the bank's risk processes.

The rating agency emphasised that UBS continues to enjoy a very strong and diversified franchise with solid earnings capability in a number of areas, and it considers there to be little risk that the problems with the bank's subprime exposures will negatively impact other parts of the franchise. In addition, the bank maintains excellent liquidity and good asset quality.

UBS' debt and deposit ratings incorporate a very high probability of support from the Swiss authorities. Consequently the downgrade of the BFSR to B+ has not impacted the debt and deposit ratings. However, a further one notch downgrade of the BFSR would be likely to result in a downgrade of the debt and deposit ratings.

UBS AG is headquartered in Zurich; as of 30 September 2007 it had total assets of CFG 2484 billion and shareholders' equity of CHF 48 billion.

London
Antonio Carballo
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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