20080704-Citi-UBS (UBSN.VX)

2Q08 Pre-Release, Updating Estimates
 At or Slightly Below Break-Even In 2Q — UBS have attempted to reassure with
a press release stating that 2Q was at or slightly below breakeven, helped by a
SFr3bn tax credit. We estimate markdowns, net of gains on own debt, of
~SFr6bn, suggesting a pre-tax loss of ~SFr5bn from the investment bank.
 Tier 1 Ratio Ahead of Target — UBS has stated that there is no need to raise
new equity, with the tier 1 ratio at approximately 11.5% at end-June, ahead of
the 10% target. After accounting for the rights issue and hybrid issuance, this
would imply a ~4% increase in RWAs during the quarter. We calculate an end-
2008E tier 1 ratio of 12.8%.
 But Leverage Remains High — In sharp contrast to the tier 1 ratio, UBS's
tangible equity/assets remains low, at an estimated 1.5% pro-forma. While
today’s statement rules out an immediate capital increase, we believe that the
Swiss regulator’s increased focus on the leverage ratio, suggests harsher
capital requirements ahead.
 Private Banking Outflows Confirmed — UBS has confirmed that group net new
money was negative in 2Q. This was most pronounced in April, but showed
some signs of improving in May and June. We see further pressure on the
private bank franchise from ongoing high-profile tax probes, lingering capital
concerns, and the troubled investment bank.
 We Stay Cautious — Conditions remain tough for UBS's core businesses. The
company-specific challenges are substantial too: risks exposures, capital,
strategy, and franchise erosion. We have raised our estimates in light of the
smaller loss in 2Q than we previously forecast.