UBS Settles LIBOR Scam with $1.5B - Analyst Blog

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UBS AG ( UBS ) has finally conceded to paying a penalty of CHF 1.4 billion ($1.5 billion) to the U.S., U.K. and Swiss authorities to resolve charges against the bank for its involvement in the manipulation of the London Interbank Offered Rate (LIBOR).

UBS admitted to the charges brought forward by the regulators and said that it involved LIBOR rate in several currencies - Yen LIBOR, GBP LIBOR, CHF LIBOR, Euro LIBOR, USD LIBOR, Euribor and Euroyen TIBOR.

Further, as part of a proposed agreement with the U.S. Department of Justice, its Japanese subsidiary, UBS Securities Japan Co. Ltd., entered a plea for issues related to the manipulation of certain benchmark interest rates, including Yen LIBOR.

Of the total penalty amount, CHF 1.2 billion will be paid in fines to the Department of Justice and U.S. Commodity Futures Trading Commission, GBP 160 million in fines to the Financial Services Authority and CHF 59 million as disgorgement of estimated profits to Swiss Financial Markets Authority (FINMA).

While settling the charges is a positive step, the upfront cost that UBS needs to bear will lead to the company reporting a loss in the fourth quarter which will likely be in the range of CHF 2.0 to 2.5 billion ($2.2 billion to $2.7 billion). Since the quarter is yet to finish, the final amount is anticipated to vary.

In addition to the CHF 2.1 billion related to the total provisions for litigation and regulatory matters, (comprising not only the LIBOR settlements, but also claims associated with the sales of residential mortgage backed-securities and other matters), the fourth quarter projected loss figure includes a couple of other items.

This consists of around CHF 0.5 billion in restructuring charges as well as approximately CHF 0.4 billion related to own credit loss on financial liabilities designated at fair value. However, on an adjusted bais, UBS anticipates posting a profit of CHF 2.5 to 3.0 billion (pre-tax) for the year.

However, this settlement does not put to rest the probes by governmental authorities as well as private litigation disclosed in the company's third quarter 2012 report. Those remain ongoing despite this settlement.

The Back Story

As a matter of fact, UBS had been subject to scrutiny over this issue for quite some time by the U.S. Commodity Futures Trading Commission, the Justice Department, the U.K. Financial Services Authority, and the Swiss regulators.

In addition to UBS, several of the big banks including Bank of America Corp. ( BAC ) and JPMorgan Chase & Co. ( JPM ) are under the strict vigil of the regulators around the world in connection to the LIBOR manipulation scam.

The LIBOR is determined on the basis of estimates of rates at which banks find it appropriate to borrow from each other. It is alleged that banks coordinated amongst themselves and submitted false rates. This fraudulent move was made to profit from trades or to appear more creditworthy than they actually are.

Since LIBOR is used as a benchmark for several lending transactions around the world, any manipulation would impact billions of users around the globe. Hence, regulatory authorities are investigating the matter thoroughly and plan to put forward an exemplary judgment so as to terminate such shrewd practices in future, bring justice to the sufferers and punish the wrongdoers.

Earlier in the year, Barclays Plc. ( BCS ) admitted to its fraudulent practices and agreed to pay a penalty of $450 million for rigging the LIBOR. On the other hand, Royal Bank of Scotland Group Plc. ( RBS ) also hopes to achieve a settlement early next year.

In Conclusion

While the settlement will put to rest a long-drawn investigation and UBS can breathe relief, this will also adversely impact its financials. Further, this settlement could be referred to as an exemplary one and could trigger similar settlements by other banks depending on their wrongdoings.

Also, in November, the company was slapped with a fine of £29.7 million ($47.6 million) for failing to prevent significant unauthorized trading that resulted in a substantial loss totaling $2.3 billion.

Notably, UBS' business has been severely impacted by the financial crisis and the company suffered huge losses on credit bets during that time. However, the Swiss government came to its aid and currently the company is subject to stringent capital norms. Moreover, the tax probe and mounting legal claims have added to its woes.

However, amidst such crisis and a challenging operating environment as well as increased capital needs, in recent months, the company announced overhauling measures, which are aimed at developing its core businesses and downsizing its distressed units.

While these are encouraging, we believe the troubles for this stock are far from over. Hence, for UBS, which currently retains a Zacks #4 Rank, implying a short-term Sell rating, we believe that following this announcement of the penalty, estimates could go down, leading to a deterioration in its Zacks Rank.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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