20080702-Citi-UBS (UBSN.VX)

2Q08 Results Preview
 Results Due 12 August — UBS is due to report 2Q results on Tuesday 12
August around 7.00am CET.
 More Markdowns — UBS has taken $38bn markdowns over 3Q07-1Q08 on
problem assets, but still carries $83bn of identified risk exposures (Figure 1),
which are likely to require further markdowns after renewed weakness in
market prices and among monolines. We factor in SFr7bn markdowns for
2Q08.
 More Capital Measures — With our estimates of 2Q losses (-SFr4.5bn), asset
shrinkage (-3% total, -1% risk-weighted), and the recent Sfr16bn rights issue,
we calculate a 10.7% tier 1 ratio versus a target >10%. Meanwhile, broader
leverage measures remain very stretched in our view. We think the group may
yet need more capital, either from shareholders or via disposals.
 Private Bank Outflows — In 1Q, PB outflows among Swiss clients (-SFr2.5bn)
were offset by inflows elsewhere (+SFr5bn). Management indicates an overall
net outflow in 2Q, which would be the first quarterly outflow in 8 years. We see
further pressure on the private bank franchise from the group's weak capital
position and ongoing high-profile tax probes.
 We Stay Cautious — Conditions remains tough for UBS's core businesses. The
company-specific challenges look substantial too: risks exposures, capital,
strategy, and franchise erosion. We lower our price target to SFr22 (from
SFr28) to reflect lower earnings (4% cut to 2009E EPS) and a lower target PE
(from 9.0x to 7.5x) to reflect these risks. We increase the Risk rating from
Medium to High to reflect the increased level of uncertainty over UBS's core
businesses.