UPDATE 2-Julius Baer expects to settle US tax case in months

Mon Jul 21, 2014 6:48am EDT

* Sees settlement of tax evasion case in months not years

* Does not give size of a potential settlement

* Buys Swiss and Luxembourg assets of Israel's Bank Leumi

* First-half adj. net profit up 10 pct

* Shares up 6.1 pct, earlier up 7 pct (Recasts with U.S. tax update)

By Joshua Franklin

ZURICH, July 21 (Reuters) - Julius Baer expects to strike a deal with U.S. authorities in a matter of months to settle a criminal investigation into the Swiss bank's role in helping wealthy Americans evade their taxes, its chief executive said on Monday.

Shares in the Zurich-based lender shot up 7 percent on the news, recovering much of the ground lost since larger rival Credit Suisse settled its U.S. tax case in May for $2.5 billion, more than double what the bank had set aside for the purpose.

This sparked some concerns Julius Baer could be caught out by a larger-than-expected fine, leading some in the market to short the stock. Dealers said Baer's half-year results published on Monday, which were above analyst expectations in many areas, eased market fears and led to profit-taking from many short sellers.

Baer has not made a provision for any potential fine, saying it cannot adequately estimate the ultimate amount. In its 2013 results, Baer budgeted 15 million Swiss francs ($16.70 million) for legal fees relating to the U.S. tax evasion case.

The bank's chief executive did not address the possible size of a fine, but did say he thought the Credit Suisse deal could help speed up its own negotiations for it and a host of other Swiss banks, including Geneva-based Pictet & Cie, which are also in the crosshairs of U.S. investigators.

"I continue to believe that in the end we will find a fair and equitable solution for the group. I think we can reasonably say that this is now a topic of a matter of a few more months and not years as in the past," Julius Baer CEO Boris Collardi said on a call after first-half earnings.

Shares in Julius Baer had fallen by around 9 percent since the Credit Suisse settlement, lagging an index of European banks which was down by 2.6 percent since then. By 1002 GMT the stock was up 6.1 percent at 38.79 francs.

One of the factors weighing on the company's valuation has been the uncertainty from the U.S. tax case and J. Safra Sarasin analyst Rainer Skierka said the bank would be boosted by a resolution in the probe.

"On the back of the recent Credit Suisse settlement... expectations for a Julius Baer penalty have substantially risen from $300-$500 million to $1 billion-plus, which would wipe out Julius Baer's estimated excess capital," Skierka wrote in a note in which he reaffirmed a "buy" rating on the stock.

"This seems to explain Julius Baer's recent share price weakness and, in our view, illustrates well that reaching a settlement could be taken with relief."

U.S. PROBE

Julius Baer also said that it will buy the private banking activities of Israel's Bank Leumi in Luxembourg and Switzerland, for up to 70 million Swiss francs ($78 million).

Israel's second largest bank is caught up in its own U.S. tax probe and the bank said last month it was close to a deal to pay nearly 1 billion Israeli shekels ($292.45 million) to the U.S. Justice Department in relation to its investigation.

Collardi said the Leumi acquisition would not leave Julius Baer liable for any fine resulting from the U.S. probe. A spokesman for Leumi said the sale does not include its American clients.

In Switzerland, where Leumi has roughly 5.9 billion francs in assets under management, Leumi will transfer its respective international clients to Julius Baer. Baer will buy Leumi's business in Luxembourg, which has around 1.3 billion francs in assets.

The deal will add a low single-digit percentage to earnings per share from 2016, Baer said, if three quarters of Leumi's clients transfer their funds, the majority of which are to be transferred by early 2015 at the latest.

Baer also posted a 10 percent rise in adjusted net profit to 288 million francs for the first six months of the year, beating an estimate of 265 million francs in a poll of analysts surveyed by Reuters

Julius Baer's cost-income ratio, a measure of a bank's efficiency, was 70.8 percent, higher than its target range of 65-70 percent from 2015. ($1 = 0.8973 Swiss Francs) ($1 = 3.4194 Israeli Shekels) (Additional reporting by Katharina Bart and Rupert Pretterklieber in Zurich and Tova Cohen in Tel Aviv; Editing by Kenneth Maxwell and Louise; Heavens)

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