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UBS able to absorb potential large fine in French tax case ruling, analysts say

UBS Group AG has enough capital to absorb a potential multibillion-euro fine in its ongoing tax fraud case in France, according to analysts.

The Swiss bank is appealing a €4.5 billion fine imposed on it in 2019 by a French trial court that found it guilty of aiding and abetting tax fraud, saying the verdict lacked a credible methodology for calculating the fine. During the appeal, the total penalty demanded by French authorities was reduced to a maximum of roughly €3 billion — €1 billion in damages and a €2 billion fine. The bank has earmarked €450 million to cover potential fines related to the case.

UBS had a common equity Tier 1 ratio of 14.5% at June 30, compared to a medium-term CET1 ratio guidance of about 13.0%. This 1.5 percentage point difference equates to more than $4 billion, and the bank continues to be "very capital generative," Pauline Lambert, executive director of financial institutions ratings at Scope Ratings, told S&P Global Market Intelligence.

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UBS should be able to absorb a fine of €4.5 billion, Lambert said.

Berenberg analyst Eoin Mullany also projected that the bank would remain above its capital target in the event of an unfavorable ruling and a maximum fine. Adjusting for the €450 million provision, UBS' CET1 ratio would fall to 13.4% from 14.5%, Mullany wrote in a Sept. 20 note.

A favorable appeals court ruling could see UBS fined broadly in line with its €450 million provision, which Mullany said would allow it to increase capital returns, most likely in the form of share buybacks. The Paris Court of Appeal is set to make a ruling Dec. 13.

UBS' management has stated it is looking to distribute to shareholders whatever capital it does not need to run the business, and it could pay out more if there are no other productive uses, Scope's Lambert said.

In the first nine months of 2021, UBS returned $2 billion of capital to shareholders via its ongoing share buyback program. Under the program, which runs from 2021 to 2024, UBS intends to repurchase up to CHF4 billion of its registered shares. Its CET1 capital position was not affected by share repurchases in the second quarter as there was an equivalent reduction in the capital reserve for this purpose, the bank said in its half-year report. It paid out a 2020 dividend of 37 U.S. cents per share in April.

Berenberg expects UBS to generate about $1.5 billion of CET1 capital over the next 10 quarters through the amortization of deferred tax assets, which the bank can use to help settle litigation, reinvest in the business or return capital to shareholders. It has rated the group's stock at "Buy."

Awaiting the outcome

A formal investigation into UBS was launched in 2014 to look into allegations that the bank helped wealthy French customers evade taxes, widening an existing probe that was initiated by French authorities in 2011.

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After the December ruling, UBS will analyze the verdict, including the fine and civil damages, a spokesperson for the bank told S&P Global Market Intelligence. If the outcome is "positive" the bank will be able to close the case, he said. If a high fine is imposed that the bank thinks is unfounded, UBS may lodge an appeal with the Cour de Cassation, which is the highest court of civil and criminal appeal in France.

"Therefore, depending on the outcome, this could still last for quite some time," the spokesperson noted.