(Bloomberg) -- Are UBS Group AG executives in denial about a looming French tax fine, or will their decision to make only a small provision for the payout turn out to be a masterstroke?
The world’s largest wealth manager has set aside just one-tenth of the 4.5 billion-euro ($5.1 billion) it was ordered to pay by a French judge last month as it appeals one of the highest penalties ever imposed on a Swiss bank. UBS gambled earlier by taking the case to trial rather than settling for what might have been a much lower amount.
Whatever the final outcome, keeping the provision low for now means the Swiss bank led by Sergio Ermotti has more money to reward shareholders with buybacks in the coming years. The French case may take "at least another four years" to be resolved as it works its way through the nation’s Court of Appeals and Supreme Court, Vontobel analyst Andreas Venditti said.
Ermotti -- like many European bank executives -- needs all the tools he can get to keep investors on board. The stock lost 32 percent of its value last year despite its positive financial results. That’s slightly worse than the 28 percent drop on the benchmark STOXX Europe 600 Banks Index. Before the verdict was announced, UBS had said its would buy back up to $1 billion of its stock this year.
UBS struck an optimistic tone today, saying it believes the verdict should be reversed and that it will be able to release the legal provisions eventually, even as it set aside $516 million for the fine.
The low amount of provisions suggests that there is scope to keep planned buybacks intact if the Swiss regulator approves, Morgan Stanley analyst Magdalena Stoklosa wrote in a note to clients on Friday.
Shares in UBS sank as low as 1.9 percent in Zurich before later recovering to trade 1 percent lower as of 10:13 a.m. in Zurich.
A Paris court ruled last month that UBS illegally laundered funds by providing French customers with banking services that hid assets from tax authorities. The judges fined UBS 3.7 billion euros and added another 800 million euros in compensation to the French government. The fine may threaten UBS’s pitch to investors of greater capital returns and share buybacks and sparked investor unease, forcingErmotti and general counsel Markus Diethelm to explain the result in a conference call.
The bank’s lawyers and board of directors have spent the weeks since the verdict assessing the implications of the fine, the largest ever in France. The increased legal provision is a recognition that UBS thinks the total cost will be significantly higher than first expected.
Provisions for the French case were $516 million at the end of the year, the bank said in its annual report on Friday, adding that the wide range of potential outcomes made it difficult to estimate the final cost. Last year’s profit was cut by $382 million as the lender increased provisions at its wealth management unit to more than $1 billion.
UBS had rejected allegations of wrongdoing in France and pushed the case to trial in the hope of wringing out a smaller penalty, but came up against both a global trend toward tougher fines for financial crimes.
The bank had total provisions of $2.83 billion last year, slightly higher than at the end of 2017.
“UBS believes that, based on both the law and the facts, the judgment of the court of first instance should be reversed,” it said. The provision “reflects our best estimate of possible financial implications, although it is reasonably possible that actual penalties and civil damages could exceed the provision amount.”
UBS has been dealing with the French probe, and the bad press that comes with it, for eight years. Ahead of last year’s trial, the lender was accused in the indictment of laundering customers’ undeclared funds, and dispatching Swiss bankers across the border to seek out new clients even though they lacked the paperwork to offer such services in France.
(Updates with shares in fourth paragraph.)
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