Banking: It Pays To Be Conservative

It turns out that it's relatively easy to survive a subprime crisis, if you're a conservative Swiss bank. The problems at Citigroup and Fannie Mae and Freddie Mac are basically that their losses are eating into their capital, leaving them at or below their capital targets, and meaning that they have very little room for maneuver. Contrast that with the latest news from UBS, which announced a recapitalization today:

Together with the capital increase, Tier 1 capital would be raised by a total of 19.4 billion francs, boosting its Tier 1 capital ratio to 12 percent.

No, that's not a misprint. While Fannie and Freddie have difficulty maintaining their Tier 1 capital ratio at around 4%, and Citigroup is trying desperately to stay at 7.5% while still paying a dividend, UBS is now all the way up at 12%. And do shareholders dislike this inefficient use of their capital? Not at all: UBS stock is up on the news, and the bank is now trading on a price-to-book ratio of 2.26, compared to Citigroup's 1.35. To put it another way, if Citi was trading on the same price-to-book ratio as UBS, it would be at $58 a share right now, an all-time high. Which is something that Vikram Pandit, or whoever becomes the next Citi CEO, might want to stop to consider.