On Wednesday, UBS announced that it had reached an agreement with U.S., U.K., and Swiss regulators to pay a $1.5 billion fine to settle charges that the bank intentionally manipulated the London interbank offered rate. The fine, though massive, was not a surprise; rumors emerged last week that the bank was likely to face a fine of at least $1 billion.
As we noted last week, we expect this settlement to have little long-term impact on UBS. First, we think that UBS, more than most global banks, is taking meaningful steps to put its past behind it and to operate under new, more conservative banking regulations. Its senior management has been replaced, and the bank is largely shutting down its fixed-income trading operations (the group responsible for the Libor manipulations) and becoming a less risktolerant company.
As a result, many analysts think the allegations speak more loudly to the UBS of the past than the UBS of the future. Second, the fine, while large, is small in comparison with UBS’ long-term value. It is equal to just 2.7% of the bank’s common equity and 2.4% of its market capitalization. Analysts were pleased to see that UBS expects that, despite the fine, its capital ratios will remain well ahead of peers. The bank estimated that its year-end pro forma fully loaded Basel III ratio is likely to be in line with the third quarter’s 9.3% ratio, and that its Core Tier 1 ratio is likely to be around 14%.
UBS is one of Switzerland’s two large banks, with CHF 1.4 trillion in total assets and CHF 2.2 trillion in assets under management as of year-end 2011. Historically, it has earned about 20% of its profit before tax from Swiss retail and corporate banking, 30% from wealth management and private banking, and about 50% from investment banking. Under its new strategy, the share of investment banking should fall to about 20%.
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