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Give UBS A Tax Break


$2.9 billion credit defrays subprime losses.

UBS (UBS), Switzerland's largest bank announced Friday that it expects second-quarter results to be "at or slightly below break-even," as compared with a $5.4 billion profit in the same period last year.

Given the fact that analysts had predicted second-quarter losses of as much as $4.9 billion, observers both here and abroad might be tempted to heave a tremendous sigh of relief at this news. Any celebration, however, would be ill-advised, and UBS bulls would do well to shimmy the cork back into the champagne bottle.

The reason for my skepticism: UBS benefited from an enormous tax credit of $2.9 billion - without it, the firm would have posted a significant second-quarter loss, having been the European bank hardest hit by the subprime debacle. According to Bloomberg, banks and financial concerns like Citigroup (C), Merrill Lynch (MER) and Lehman Brothers (LEH) have tallied $402 billion in writedowns and credit losses associated with the subprime crisis.

In May, UBS was forced to close its hedge fund, Dillon Read Capital Management, but reported that it has already paid back roughly $1.5 billion to investors following the closure. CEO Marcel Rohner also announced plans to eliminate over 5500 jobs in an effort to cut costs.

The release also reported that "group net new money was negative for the period," particularly in April but improving in May and June. This means that there was an outflow of money in those months, along with a number of client defections, particularly from the money management division. UBS is still reeling from accusations that it may have helped some clients avoid taxes, and the long-term effects on its ability to command investor confidence remain to be seen.

Anxious institutional shareholders might also find the release's lack of forward-looking guidance off-putting, and could be moved to seek greener pastures, adding pressure to the already struggling stock.

The only good news: UBS did indicate that it currently "has no need to raise new equity," which means that it will not be diluting shareholder value, at least in the short term. The bank's Tier 1 ratio, a measure of solvency, was 11.5% on June 30, as compared with 6.9% at the end of March, and the company's fortunes could well change over the coming quarters.
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No positions in stocks mentioned.

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