UBS AG Seeing Benefits from Covered Bonds

The now-profitable UBS AG still faces at least a couple of challenges that date back to its involvement in the U.S. subprime mortgage space, but is seeing some funding diversification benefits from a new Swiss residential mortgage covered bond program. The company as a whole, which previously had been struggling with a chain of quarterly losses, generated a profit of about 1.2 billion Swiss francs ($1.1 billion) in the fourth quarter. Remaining mortgage-related challenges for the firm include exposures to monoline insurers through credit-default swaps of asset-backed securities. As of Dec. 31, the total fair value of CDS protection purchased from the monolines was $2.3 billion after cumulative credit valuation adjustments of $2.8 billion. Some of the related charges in this area did not flow through as profit or loss because of accounting rules for assets characterized as loans and receivables. The company in the fourth quarter also faced a suit in the Southern District of New York alleging securities fraud in connection with disclosures relating to its losses in certain areas that include subprime mortgage markets. It is seeking to have the claim dismissed. During the fiscal period the company said it was able to diversify funding by issuing the equivalent of 4.5 billion Swiss francs ($4.2 billion) in euro-denominated five- and 10-year covered bonds backed by Swiss residential mortgages.