On Thursday, Moody’s Investors Service cut various ratings on UBS (NYSE: UBS), citing significant challenges the company continues to face, in both the Investment Banking and Wealth Management businesses. This cut comes at a difficult time for an already struggling bank, which can scarcely afford an increased cost of funds.
The bank’s financial strength rating was lowered two notches to C, from B-. Its deposits and senior debt ratings were lowered to Aa3, from Aa2. The ratings for senior subordinated debt were also cut to A1, from Aa3. In the outlook, Moody’s has also noted ongoing negative sentiment, which implies that further downgrades are possible in the next year to eighteen months as the firm continues to be monitored.
What has drawn such a deep decline in their ratings? Consistent with the general public opinion, Moody’s has expressed concern over customer confidence, which is evident by the ongoing net fund outflows from the wealth management business. This measure is important in every bank, where new money and customers come in, while other customers take their money out to other firms continuously. In recent performance, UBS has suffered a net loss. Amidst this problem, a number of key employees have left the firm, which has resulted in a significant decline in both the investment banking and fixed income division’s revenue.
Recently, the Organization for Economic Cooperation and Development (OECD) adopted standards for tax cooperation for Swiss banks, which will likely impact the firm negatively as well. Historically, Swiss banks enjoyed large foreign deposit inflows over the years, as a result of the country’s loose tax system that promoted secrecy. The IRS in the United States also filed a lawsuit along these lines against UBS last year, which has diluted the secrecy as well and opened up clients to taxation. As worried investors eye safer refuge, UBS funds are experiencing large outflows.
To date, UBS has reported four consecutive quarterly losses, reflecting ongoing global economic turmoil. The firm’s balance sheet was particularly stressed during the sub prime crisis, leading to record losses along the way. The Swiss government aided the firm and prevented collapse during the 2008 crisis, but as they dig out from the rubble, they will find an unfriendly debt market waiting for them. As government influence banks typically have performance that lags behind the industry, coupled with ratings cuts raising the cost of borrowing, and net outflows, the near future will be precarious for UBS.
