UBS AG Shares Dip on Rate Rigging Scandal - Analyst Blog

Following the latest news on UBS AG‘s UBS involvement in a rate-rigging scandal, shares of UBS fell more than 2% at the trading session in Zurich. On Friday, the Hong Kong Monetary Authority (HKMA), Hong Kong's main banking regulator accused the bankers at UBS of trying to manipulate the Hong Kong Interbank Offered Rate (HIBOR) between 2006 and 2009 in China. However, UBS was safeguarded from fines to be imposed as such attempts of manipulation minimally affected the HIBOR.

The HIBOR is determined on the basis of estimates of rates at which banks find it appropriate to lend to each other. This rate is used by lenders and borrowers conducting business in Asia. Notably, since 2010, UBS has not been a part of the HIBOR fixing panel and further sanction is questionable.

Manipulation of benchmark interest rates by major financial institutions triggered thorough investigations by regulatory bodies across Europe, Asia and America. Such investigations have cost several major global banks billions of dollars in settlements. Alongside, we apprehend such scandals to dent the financials of these banks over the long term.

The Allegations

The regulators in Hong Kong initiated the investigation into HIBOR fixing in Dec 2012 after receipt of information related to misconduct by UBS from overseas regulators. Later on, several other banks including HSBC Holdings plc (HSBC), Deutsche Bank AG DB, The Royal Bank of Scotland Group plc RBS and Societe Generale Group came under the purview of investigation when penalties for rigging interest-rate benchmarks summed $6 billion worldwide.

However, the regulator found substantial proof of misconduct against UBS alone and no conspiracy between these banks to manipulate the HIBOR were discovered. Internal chat messages totaling 100 were unearthed by investigators, which were conveyed by UBS traders showing “change requests” related to HIBOR. Moreover, one-third of such messages actually influenced the rate put forward by UBS for the HIBOR.

Therefore, HKMA has found flaws in UBS' internal controls and governance related to the matter and has demanded the bank to take disciplinary action against its staff members who failed to report misconduct. Moreover, UBS has to work on a new supervision plan within six months and the efficacy of the same should be verified by an external auditor.

However, six traders involved in the rate manipulation along with the employee responsible for submitting the rate have already left the bank.

Similar Issues

This is the latest revelation in the series of scandals related to manipulation of benchmark interest rates for UBS. Back in Dec 2012, UBS conceded to pay a penalty of CHF 1.4 billion ($1.5 billion) to the U.S., U.K. and Swiss authorities to resolve charges against the bank for its involvement in the manipulation of the London Interbank Offered Rate (LIBOR).

UBS admitted to the charges brought forward by the regulators and said that it involved LIBOR rate in several currencies - Yen LIBOR, GBP LIBOR, CHF LIBOR, Euro LIBOR, USD LIBOR, Euribor and Euroyen TIBOR. Further, as part of a proposed agreement with the U.S. Department of Justice, its Japanese subsidiary, UBS Securities Japan Co. Ltd., entered a plea for issues related to the manipulation of certain benchmark interest rates, including Yen LIBOR.

In Conclusion

Regulatory authorities are investigating scandals related to manipulations and are determined to put forward a landmark judgment to terminate such shrewd practices in the future, bring justice to the sufferers and punish the wrongdoers.

Notably, UBS' business has been severely impacted by the financial crisis and the company suffered huge losses on credit bets during that time. However, the Swiss government came to its aid and currently the company is subject to stringent capital norms. Moreover, the tax probe and mounting legal claims have added to its woes.

However, amid such crisis and a challenging operating environment as well as increased capital needs, the company announced several overhauling measures and restructuring, which are aimed at developing its core businesses and downsizing its distressed units.

While these are encouraging, we believe the troubles for this stock are far from over. Currently, UBS carries a Zacks Rank #3 (Hold).