Financials Capital Increases

Well, in regular intervals we get to hear the latest update of how much USD the banks had to write down so far. According to Bloomberg this has been USD 383 billion so far. You wonder how the banks were able to survived these massive writedowns. To my knowledge there has been only a single real casualty (not considering hedge funds), namely New Century. IKB, Northern Rock, West LB, Countrywide, Bear Stearns have all been knocked out but still got saved by someone (except for Countrywide in all cases by the tax payer).

Well, the reason all the other banks survived so far is, also according to Bloomberg, they increased capital buy a whopping USD 270 billion. Also, still counting.

E.g. the latest UBS capital increase will create 760 million new shares. Before the crisis UBS payed lots of money to buy back shares for up to over CHF 70 per share to bring the number of shares outstanding down to some 2'054 million shares. After this capital increase (for an expected CHF 21 per share - just compare this to the brilliant previous share buy back program!) and including the previous sale to Singapore etc. the new number of shares outstanding will be exactly 2,932,567,127 shares. Almost 43% more. A nice dilution for the existing shareholders :).

BTW, with almost 3 billion shares outstanding and Friday's share price of CHF 29.94 this will amount to a market cap of CHF 87 billion. To justify this with a meager P/E ratio of 10, UBS will have to earn after tax net income of CHF 8.7 billion. Well, wealth management might be able to earn 10 billion pre tax alone, but with still a lot of uncertainty about the existing risky positions and big question marks about the future earnings power of the investment bank, I fail to see the current upside potential. But then, I could buy some now for twenty one a share...