Dec 19 - UBS’s CHF1.4bn Libor settlement highlights the political, regulatory and reputation risks for UBS and other major global trading banks involved in setting the benchmark rate, Fitch Ratings says. UBS’s recent decision to significantly accelerate the restructuring and reduction of risk-taking in its investment bank, once fully implemented, should reduce these risks in the future.
We believe UBS’s strategy to significantly scale down its investment bank should lead to better quality and less volatile earnings, an improved risk profile and a more balanced funding position. This view underpins the Rating Watch Positive on its ‘a-’ Viability Rating.
The Libor fine is larger than we anticipated but can be absorbed by 2012 earnings so that UBS will maintain a solid capitalisation. This will be helped by the continuing risk-weighted asset reduction in its investment bank. The group expects to report an adjusted pre-tax profit in the approximate range of CHF2.5bn-CHF3.0bn for 2012, although Q412 will show a loss due largely to the provisions for litigation and regulatory matters. UBS expects its fully-loaded Basel III common equity Tier 1 ratio to be roughly in line with 9.3% seen in Q312.
The complexity of trading banks’ business models and their exposure to large unexpected risk make it more difficult to predict and assess the size of losses that can emerge rapidly from unexpected events, such as the Libor investigation. Additional impacts include the potential for material litigation expenses and civil settlement costs. The potential for lasting damage to individual franchises as a result of the scandal is unclear. As the investigations proceed and the involvement of other banks becomes clearer, the burden is likely to be shared amongst a broader group.
The impact of the Libor investigation does not currently alter our view on the credit ratings of the Global Trading and Universal Banks (GTUBs). However, if the investigations or any reputational damage result in a notable and lasting business or financial impact that significantly changes a bank’s credit risk profile, we would then reconsider the ratings of the affected institutions.