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 The increase in legal reserves shows Switzerland's largest bank is
struggling to move on from past scandals, including a $1.5 billion
settlement for interest rate rigging and $885 million to settle
claims that UBS defrauded two U.S. government-controlled companies
before the 2008 financial crisis.
"We all knew there would be bumps in the road and some of these
challenges remain," UBS <UBSN.VX> Chief Executive Sergio Ermotti
told investors on a call about third-quarter results.
Besides the legal setbacks, the bank's earnings showed signs of
health, especially at its flagship private banking division which
caters for wealthy clients. It continued to bring in more money and
increased profitability.
Authorities around the world are investigating allegations that
traders at some major banks rigged the $5.3 trillion-a-day currency
market, the world's biggest but least regulated.
Zurich-based UBS did not link the extra legal reserves, which bring
the amount put aside for future litigation to 3.469 billion francs,
to the foreign exchange investigations.
But UBS said for the first time it was talking to the U.S.
Department of Justice's criminal and anti-trust divisions about how
to resolve their investigation into currency rate rigging.
Despite the reserves, UBS beat forecasts for third-quarter net
profit with a 32 percent rise from last year, largely due to a 1.3
billion-franc gain from how it accounts for past losses.
"All told, it will take UBS much longer and cost them much more to
resolve their past, but at least the bank's business is on track
again," said Dirk Becker, an analyst for Kepler Capital Markets who
rates UBS as hold with a 17-franc target.
UBS shares climbed 4.7 percent to 16.2 francs at 6.23 a.m. EDT, the
best performer in the European banking sector.
DIVIDEND TARGET
The bank is halfway through a three-year drive to focus on private
banking, shrink its investment bank and abandon riskier activities
such as bond trading. The goal is to pay out at least half of
profits to shareholders after hitting capital targets, which is
expected this year.
The bank said third-quarter net profit was 762 million francs,
exceeding the 737 million francs forecast by analysts in a Reuters
poll.
Its private bank brought in 9.8 billion francs in net new money, a
key indicator for future revenue. This translates to growth on
existing assets of more than 4 percent, healthier than crosstown
rival Credit Suisse.
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The new funds and a rise in the private bank's margin were the
bright spots, according to several analysts. The bank said, however,
that the Ebola virus added to a range of concerns, from political
tension in Ukraine to fiscal issues in the euro zone, that have kept
clients on the sidelines and weighed on income.
Skirmishes with regulators and lawsuits over business dealings have
become a mainstay of bank earnings globally following the financial
crisis of 2008 and 2009.
"At this point in time, we believe that the industry continues to
operate in an environment where charges associated with litigation,
regulatory and similar matters will remain elevated for the
foreseeable future," UBS said in a statement.
Two weeks ago, U.S. investment bank JPMorgan Chase & Co surprised
investors by putting $1 billion aside to resolve probes into alleged
currency rigging.
Britain's financial regulator has intensified talks with six banks,
including UBS and JPMorgan, over similar allegations, setting the
stage for a group settlement that could cost them close to 2 billion
pounds ($3.2 billion).
UBS had already raised its provisions for future litigation to 1.98
billion francs earlier this year and the currency market
investigation is one of several legal headaches facing the bank as
it reduces its investment banking business.
In France, UBS is being investigated for allegedly helping wealthy
investors avoid tax, which the bank says "will now be a matter of
years and not months" to set side.
Investigating magistrates had proposed that the bank pay a fine of
4.88 billion euros in the investigation, according to a judicial
source.
(Additional reporting by Joshua Franklin; editing by David Clarke)
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