UBS was blindsided by a French criminal ruling against the bank carrying a $5 billion fine. How worried should the Swiss bank's investors be about losing juicy payouts after the setback?
The Zurich-based bank's $5 billion penalty for allegedly helping French clients dodge taxes and launder money ranks as UBS' highest-ever, as finews.com tallied. For now, because the bank is appealing the ruling, it doesn't have to pay a centime.
UBS also probably won't be padding its legal reserves anytime soon: to do so, CEO Sergio Ermotti and legal brain Markus Diethelm would have to be strongly convinced they will lose on appeal. On Friday, the two sought to calm investor fears that UBS, which pays more than half of profits out to shareholders, will curb payouts.
Vowing to Fight
After bashing the judgement in detail on Thursday, Ermotti and Diethelm on Friday laid out why they will continue to fight. Diethelm, an 11-year veteran of UBS who previously won a billion-dollar dispute for Swiss Re over the World Trade Center terrorist attacks, slammed the French judge's ruling as «thin».
So, is it business as usual for UBS as the bank heads into a two-year appeal? The Damocles sword of a potential fine is still hanging over the bank, but Ermotti is keen to assure investors UBS has the deep pockets to protect shareholder returns for now.
«We Don't Gamble»
«We do not gamble with our shareholder's capital», Ermotti insisted on Friday, in response to suggestions including in finews.com that he and Diethelm may have misjudged the situation, at the expense of shareholders. He also rejected the notion that the bank had failed to reach a settlement while it could, as HSBC in Switzerland did 15 months ago.
To be sure, Ermotti is taking the economically sensible option in delaying any payment UBS may need to make for as long as possible. «We can withstand and afford taking such a stance in resolving matters», he said on Friday, referring to UBS' healthy capital and liquidity.
Piling Reserves?
UBS, which plans to pay out 0.70 Swiss francs per share for 2018 and is currently buying back as much as $2 billion of its stock, will protect that level, at least, even if hit with what it called «a very adverse scenario», or losing on appeals. At worst, Ermotti is looking to keep UBS' dividend at 2018's level, he telegraphed to investors – though of course he would like to keep hiking it, as the bank has done since 2011, as well as keep repurchasing shares.
As for adding legal reserves, Ermotti said UBS would evaluate whether it would do so by mid-March. UBS has stowed roughly $2.5 billion in total provisions to settle past scandals including for rigging Libor and for allegedly mis-selling mortgage securities in the run-up to the financial crisis.
