Fallout from the subprime lending crisis could effectively wipe out next year’s profits for the global banks, suggests research from UBS Ltd.

“Problems related to the U.S. subprime crisis are getting worse,” it says in a report. “Delinquency risk is rising and spreading, while liquidity conditions are deteriorating.” The report tries to quantify the potential earnings shock facing the sector and see if this spills over into capital-raising needs and/or a credit crunch.

It estimates residual subprime-related losses for listed global banks at US$285 billion, which equals 99% of estimated retained earnings for 2008, and that’s assuming a 44% dividend payout ratio.

Overall, it puts potential industry losses at US$605 billion, of which US$355 billion would be incurred by listed banks and brokers (US$70 billion of which has already been disclosed). Subprime CDO and mortgage losses are expected to account for US$250 billion of the US$335 billion total, along with ABCP-related losses of US$60 billion, LBO losses of US$25 billion, and CMBS losses of US$20 billion.

“As such, we do not anticipate large-scale, system-wide capital-raising, although the re-pricing of risk and tighter underwriting standards will likely result in balance sheet shrinkage and a period of much slower growth,” it says.

“Reflecting the more challenging operating environment, we recommend banks with diversified income streams, strong retail franchises, emerging markets exposure and/or capital strength,” it says. That list includes ANZ, Barclays, Unicredit, Swedbank, NBG, Sberbank, Standard Bank, Unibanco, SMFG and Suruga.