March 23, 2015 / 10:16 AM / 4 years ago

Fitch: Risks from FHFA Lawsuit Likely Manageable for Nomura

(The following statement was released by the rating agency) HONG KONG/LONDON, March 23 (Fitch) A lawsuit by the US Federal Housing Finance Agency (FHFA) against Nomura Holdings, which went to trial on 16 March, is unlikely to have a significant ratings effect, says Fitch Ratings. But litigation is unpredictable and may yet prove costly to Nomura. The FHFA is seeking slightly more than USD1bn from the Japanese broker as part of a wider series of lawsuits against financial institutions for allegedly misrepresenting the underlying asset quality and risk of mortgage-backed securities they sold to US mortgage finance companies Fannie Mae and Freddie Mac. Seventeen of the 19 institutions sued by the FHFA have settled out of court, with Nomura the first to opt to go to trial. Previous settlement rates have varied significantly, at 1%-14% of the original face value of the securities in question. In aggregate they have totalled more than USD20bn, making the FHFA suits among the largest legal settlements in US history. The more thanUSD1bn claim cited in the media would be manageable for Nomura, especially as it would be netted against the current value of the securities - roughly USD400m - that the company would receive back. The net cost of such a worst-case scenario claim would be greater than our previously published USD200m-300m settlement estimate which was predicated on Nomura agreeing to a settlement with the FHFA, but less than 15% of FY14 pre-provision profits. The financial settlements reached with the FHFA by the 17 other lenders did not result in any negative rating actions, and Fitch considered them manageable considering their levels of capital and profitability. The FHFA settlements have put a key source of legal uncertainty behind these banks, but many are global trading and universal banks still exposed to other conduct investigations and risks. Litigation stemming from banks' activities with the federal housing agencies, Fannie Mae and Freddie Mac, is nearing its end, but some banks that were active in the US residential mortgage market leading up to the crisis may still face risks emanating from private-label mortgage securitizations due to still unresolved private litigation and potential enforcement actions from the RMBS Task Force. There is also an outstanding FHFA lawsuit against RBS regarding USD32bn of mortgage-backed securities. Of these approximately USD9.5bn were outstanding at end-2014 with cumulative write downs of approximately USD1.09bn. This is significantly greater exposure than Nomura's, according to our estimates. In 2014, RBS's charges for litigation totalled GBP0.2bn, down from GBP2bn in 2013, and the group had built up GBP1.8bn provisions for litigation at end-2014. RBS is subject to a number of legal proceedings and investigations by various authorities and is exposed to material conduct risk. We expect conduct costs to remain material and believe that it will be important for RBS to continue to strengthen capital in accordance with its plans, primarily through the reduction of risk-weighted assets, to increase the cushion it has to absorb fines. Contacts: Jon Cornish Managing Director Financial Institutions +852 2263 9901 Fitch (Hong Kong) Limited 2801 Tower Two, Lippo Centre 89 Queensway Hong Kong Claudia Nelson Senior Director Financial Institutions +44 203 530 1191 Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Global Banks: FHFA Lawsuit Settlements here FHFA Bank Litigation Update (Most Banks Decide to Go the Settlement Route) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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