Deutsche Bank, UBS profits battered by rising legal costs

Capital Ratio

The Swiss bank said it’s taking measures against individuals as it conducts an internal review of its foreign- exchange business. The firm didn’t identify or quantify the number of employees involved or specify what actions it took.

The Swiss regulator’s demand for more capital is a setback for Ermotti, who decided to exit most debt-trading businesses at the investment bank last year to boost returns. The bank, which paid about 3 billion francs in fines and settlements for litigation in the past year, said it expects “elevated charges” for legal and regulatory matters through 2014.

The Swiss Financial Market Supervisory Authority’s demand adds about 28 billion francs to UBS’s risk-weighted assets and reduces the Basel III common equity ratio by 130 basis points as of Oct. 1 from 11.9% at the end of September, UBS said.

Finma Demands

Examining the bank’s internal models is one of Finma’s core tasks and the regulator can impose surcharges if results from internal models don’t correspond to a conservative assessment of potential risks or empirical evidence, said Tobias Lux, a spokesman. He declined to elaborate on the specific demands for UBS or say whether Finma has made similar demands to Credit Suisse Group AG. A Credit Suisse spokesman, Marc Dosch, declined to comment.

UBS still expects to be able to boost its Basel III common equity ratio to more than 13% in 2014. The regulator’s demands for higher risk weightings to be assigned to litigation and compliance matters will be partially offset by the boost in capital the bank will get from repurchasing a fund from the Swiss National Bank.

Reaching that capital target is at top of the bank’s agenda for next year, Ermotti said. UBS plans to start paying out more than 50% of profits as dividends after it reaches the capital target.

The bank’s plan to buy back the SNB’s fund, which was used to wind down UBS’s toxic assets from the subprime crisis, will add 100 basis points to the capital ratio, more than the company previously estimated, as the fund’s assets have shrunk to 1 million francs. A basis point is equivalent to one hundredth of a percentage point.

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