RPT-Swiss banks risk bigger than expected fines in U.S tax case

Mon Jun 2, 2014 2:16am EDT

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By Joshua Franklin and Patrick Temple-West

ZURICH/WASHINGTON May 30 (Reuters) - Swiss banks under investigation for allegedly aiding U.S. tax evasion face the prospect of bigger fines than they bargained for that could dent their capital and force some to cut dividends.

The Alpine nation's bankers got a jolt last week after Credit Suisse agreed to plead guilty to helping wealthy Americans evade taxes and pay a fine of $2.6 billion, more than double the amount it had set aside for the purpose.

Thirteen other private banks were left scrambling to calculate the possible fallout on their own finances of harsher than expected penalties following the three-year investigation by the U.S. Department of Justice (DOJ).

The exact size of their U.S. operations is not publicly known and some are clearly much smaller than others, making it difficult to use the Credit Suisse fine as a gauge for the others caught in the probe.

But the uncertain outcome of the investigation and the lack of detail on how the Credit Suisse penalty was calculated has left analysts with little option but to bump up their most pessimistic estimates for future fines.

Even a penalty exceeding what they have set aside by $200 million would have wiped out about 40 percent of the collective 2013 profits of the three smaller Swiss banks known to be targeted by the probe who publish accounts, according to Reuters calculations.

The banks all boast capital ratios well above regulatory minimums, but these ratios would fall by between 0.3 and 2.6 percentage points in the event they were each fined $200 million more than their current provisions, the calculations suggest.

Not all the names of the banks being investigated have been made public but they include Julius Baer, Basler Kantonalbank, Zuercher Kantonalbank (ZKB) and Swiss arms of Lichtenstein's LLB and the UK's HSBC.

Wegelin & Co, the oldest Swiss private bank, said in January last year it would shut its doors permanently after more than two and a half centuries following a guilty plea to charges of helping wealthy Americans evade taxes through secret accounts.

Swiss private bank Frey & Co said it would close in October, citing "unsustainable costs" stemming from the tax evasion dispute with the United States.

"NEGATIVE SURPRISE"

Zurich-based Julius Baer is the second-largest Swiss bank to face DOJ scrutiny. In the days after the Credit Suisse settlement was announced, its shares fell to their lowest since early April before recovering this week.

"Before, the consensus (for a possible Julius Bear fine) was between 300 million and 500 million Swiss francs ($336-559 million) at the most," said Andreas Brun, an analyst at ZKB. "Now there are some analysts who even say it could be over a billion. It's just because there was a negative surprise at Credit Suisse."

Julius Baer has distanced itself from the Credit Suisse outcome, saying the two cases cannot be compared.

Last year it budgeted 15 million francs for legal fees relating to the U.S. tax evasion case, and has said it did not make a provision for a fine as it could not adequately estimate the ultimate amount.

Fund managers and analysts said a fine in excess of $1 billion could be more than the bank can cover without having to cut dividends or tap investors for cash. It made a net profit of about $210 million last year.

"What they can save by completely cutting the dividend is not really moving the needle," said MainFirst analyst Kilian Maier, who said a fine for Julius Baer could be around $555 million, but may well be higher.

"If you think it will affect the dividend, the next question will be: will they need a capital increase?"

COOPERATION IS KEY

ZKB has not publicly disclosed any amount set aside for possible fines and legal fees in the tax case. LLB said it had made legal provisions of around 27 million francs across three companies including LLB Switzerland.

HSBC declined to comment.

Basler Kantonalbank took a 100 million Swiss franc ($112 million) provision against earnings last year to cover legal costs and fines from the U.S. crackdown.

It welcomed Credit Suisse's settlement.

"It's a sign for the ... banks (in the probe) that they can close their cases," Basler Kantonalbank Chief Executive Guy Lachappelle told Reuters. "But the cases are not comparable."

A lawyer representing some of the Swiss banks said some were negotiating fines with the DOJ but were waiting to see how the Credit Suisse settlement concludes.

Regarding the timing of any finalised settlements, "it's all over the map," the lawyer said, declining to be named because the talks are under way.

Switzerland's Finance Minister Eveline Widmer-Schlumpf said last week she hoped the remaining banks would conclude their negotiations with U.S. authorities in the next few months.

She too insisted the Credit Suisse settlement was not a template for future fines.

"It depends on the individual case," Widmer-Schlumpf said at a news conference in Berne. "In particular, it depends on the size of the offence and how well the bank has cooperated."

The DOJ last week slammed what it perceived as Credit Suisse's lack of cooperation, adding that this counted against the bank in the final settlement - and implying a different outcome for banks that do work with the department.

"Credit Suisse's lack of effective cooperation was an important additional factor in determining the resolution of the case," U.S. Deputy Attorney General James Cole said on May 21 in a talk at the University of Texas School of Law. "Put simply, cooperation matters." ($1 = 0.8940 Swiss Francs) (Additional reporting by Rupert Pretterklieber and Oliver Hirt in Zurich; editing by Laura Noonan and Tom Pfeiffer)

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