UBS, Citigroup Rise on Speculation Worst May Be Over (Update1)

By Christine Harper

Oct. 1 (Bloomberg) -- UBS AG and Citigroup Inc., the biggest banks in Europe and the U.S., rose in stock market trading on investor optimism that their reports today on fixed-income losses may represent the low point for earnings.

Citigroup added $1.05, or 2.3 percent, to $47.72 at 4:17 p.m. in New York Stock Exchange trading. UBS rose 1.9 Swiss francs, or 3 percent, to 64.5 francs in Zurich, where the company is based. New York-based Citigroup has fallen 14 percent this year, while UBS shares are down 13 percent.

Analysts at firms including JPMorgan Chase & Co. and Merrill Lynch & Co. have reduced estimates for UBS and Citigroup since late August on concern about losses from mortgage-related securities and leveraged buyouts. While the losses disclosed today exceed most estimates, investors are speculating that the writedowns mean earnings won't get any worse.

``The certainty of the charge is an improvement from the uncertainty that had hit the shares previously,'' said Matt Spick, an analyst at Deutsche Bank AG in London who recommends buying UBS shares. ``The bulk of UBS's businesses are performing well, and this has also been confirmed by the statement today.''

UBS wrote down the value of debt securities by more than 4 billion Swiss francs ($3.4 billion), leading to a pretax loss of 600 million to 800 million francs in the quarter. Citigroup, based in New York, said third-quarter profit dropped 60 percent because of $5.9 billion of credit and trading losses.

The loss at UBS and management changes by Chief Executive Officer Marcel Rohner probably put a floor under the bank's fixed-income division, said analysts including JPMorgan's Kian Abouhossein, who rates UBS shares ``underweight.''

More Subprime Assets

Even after the writedowns, UBS said today it still has more than $19 billion of subprime residential mortgage-backed securities and almost $4 billion of assets, such as warehouse credit lines and collateralized debt obligations, that are backed by subprime loans.

``The market believes they are probably marking for the worst-case scenario,'' making it easier to show improvement in 2008, Abouhossein said. UBS's fixed-income division hasn't outperformed rivals since 2005.

UBS will also benefit next year because it's stronger in equities and emerging markets than competitors, and weaker in businesses likely to grow more slowly, such as asset-backed securities and leveraged lending, Abouhossein said.

``Equities looks like a good place to be, rates and foreign exchange are a good place to be,'' he said.

Lower Estimates

JPMorgan cut its forecast Sept. 6 for UBS third-quarter earnings to 5.75 francs a share from 5.87 francs a share. The UBS investment banking unit would probably post a pre-tax profit of 578 million Swiss francs, JPMorgan had said. Credit Suisse analysts cut their forecast and downgraded Swiss rival UBS to ``neutral'' from ``outperform'' after it reported second-quarter results on Aug. 14.

At Citigroup, Chief Executive Officer Charles Prince said in today's statement the bank expects ``to return to a normal earnings environment in the fourth quarter.''

As with UBS, analysts said Citigroup is marking down values to reflect the worst possible outcome, a tactic some liken to renovations in which everything including the kitchen sink is thrown out.

``There looks to be a degree of 'kitchen-sinking' going on here with Citi calling the result an `aberration,' '' Corinne Cunningham, a credit analyst at Royal Bank of Scotland Group Plc in London, wrote in a note to investors.

``It's critical to put Citibank's financial strength into perspective,'' said David Katz, who helps oversee $1.6 billion including Citigroup shares as chief investment officer at Matrix Asset Advisors in New York. ``They did say they were expecting to return to normal operating profitability in the fourth quarter.''

Last Updated: October 1, 2007 16:30 EDT