UBS at risk after $5 billion surprise penalty

UBS Group AG’s decision to fight a tax case in France, rather than settle it, led to a nasty surprise.

Switzerland’s biggest bank was ordered to pay more than $5 billion Wednesday over a tax-evasion case in France — matching what was sought by prosecutors. That’s five times what some analysts expected, the biggest ever fine for a Swiss bank, and more than 15 times what HSBC Holdings paid to settle a similar matter in France in 2017.

Chief Executive Officer Sergio Ermotti’s legal team had played hardball, rejecting allegations of wrongdoing and pushing the case to trial in the hope of wringing out a smaller penalty. While UBS said it will appeal, the penalties dwarf what the bank had set aside for legal issues and amount to more than it earned for all of last year.

(More: UBS eschews $6 billion settlement in French tax investigation)

Now, Mr. Ermotti’s plans to return capital to investors — a key element of his strategy at the world’s biggest wealth manager — may be at risk.

“We see a possibility that the buyback may have to be postponed until 2020, even if UBS does plan to appeal,” Citigroup Inc. analysts led by Andrew Coombs said in a note to clients.

The Paris criminal court ruled Wednesday that UBS illegally provided French customers with banking services to hide assets from tax authorities. The judge fined UBS 3.7 billion euros ($4.2 billion) and added another 800 million euros in compensation to the French government. The penalty dwarfs the 1.4 billion-franc ($1.4 billion) 2012 settlement with U.S., U.K. and Swiss authorities over Libor fixing.

UBS probably hasn’t made significant provisions yet, according to analyst Jon Peace of Credit Suisse Group AG, who said the consensus view of analysts had been that the bank would earn $4.2 billion this year. UBS had set aside $640 million to resolve legal matters in wealth management, its biggest business.

“UBS strongly disagrees with the verdict” and denies any criminal wrongdoing, the bank said in a statement shortly after it was delivered, arguing that the conviction wasn’t supported by concrete evidence. Once moved to the court of appeal, the case will be retried “in its entirety,” the bank said.

Like other Swiss banks, UBS has repeatedly defended itself in tax-evasion cases as governments seek to track cash hidden in secret bank accounts. In 2017, German prosecutors carried out searches in connection with an investigation of about 2,000 UBS clients on suspicion of tax fraud, extending a series of probes into its customers that stretch back at least five years. Swiss rivals Credit Suisse and Julius Baer Group settled with the German authorities in 2011, paying 150 million euros and 50 million euros, respectively.

(More:​ UBS ordered to pay more than $5.1 billion in French tax case)

While the French decision isn’t final, uncertainty over how much the bank will ultimately pay looks set to linger. Andreas Venditti, an analyst at Vontobel Holding AG, said he expects Mr. Ermotti not to change the dividend policy or make more legal provisions for now, given the length of the coming process.

“UBS will take this further down the line, and then the game begins again,” Mr. Venditti said by phone. “In the Court of Appeals, everything will start again from scratch.”

Related Topics: UBS Wealth Management