Financials Weekly Notes: UBS, BofA & Barclays

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Bank shares rose without inhibition over this action-packed week as slow but steady progress in budget talks between the Republicans and Democrats, coaxed investors to look beyond their fears of the fiscal cliff. An improvement in sentiments buoyed share prices across sectors, with financials leading the rally on the back of positive outlooks for banks by the independent analysts Richard Bove and Meredith Whitney early this week. Shares of Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) booked the most gains, each adding nearly 9% in value over trading before the closing bell Thursday. Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS) also reported handsome 7% gains over the period, with the KBW Bank Index jumping by well over 5%.

However this enthusiasm slid to a halt when House Speaker, John Boehner, scrapped plans Thursday night to hold a vote on a bill to avoid $500 billion in spending cuts and tax increases scheduled to begin in January.

In addition to this news, Tuesday UBS (NYSE:UBS) revealed that it will foot a bill of about $1.5 billion to settle investigations into its role in manipulating the Libor during the economic downturn of 2008. The British banks Barclays (NYSE:BCS) and RBS (NYSE:RBS) also broke into a sweat as U.K.’s Parliamentary Commission on Banking Standards reopened the contentious debate on completely breaking up the retail and investment banking businesses of all U.K.-based banks.

UBS: The Kingpin of Libor Rigging Racket?

Earlier this week, the largest Swiss bank revealed that it will pay CHF 1.4 billion ($1.5 billion) to American, British & Swiss authorities to settle charges that the bank was involved in manipulating the benchmark London Interbank offer rate (Libor) in late 2008, to squeeze profits even as the global economy was headed for a recession. More trouble is yet to come, as immediately following the announcement, regulators in Hong Kong began an investigation in into the bank’s possible role in manipulating the Hong Kong Interbank offer rate (Hibor). [1]

The amount is more than three times the $451 million Barclays paid to settle similar charges levied against it. The heavy penalty on UBS despite its pleading guilty to charges is reportedly because the investigating authorities were convinced that the bank not only rigged the rates, but also coordinated similar manipulations by other banks to orchestrate a significant movement in the Libor. [2]

Details about this settlement can be found in our article UBS Settles Libor Manipulation Charges At A Whopping $1.5 Billion.

See our full analysis for UBS

Bank of America

If the share price is any indicator of the financial health of a company, then we can safely say that Bank of America has crawled back up after hitting lows. But how?

The bank was riddled with problems all through 2011, with multi-billion dollar settlements related to its mortgage business and a piling list of lawsuits dragging down its share price, from about $14 dollars at the beginning of the year 2011 to below $6 at the end of it. But the progress made by the bank in its reorganization plan, Project New BAC, has seen share price nearly double in 2012, to its current levels of around $11.50. A good portion of this share price appreciation came over December, with the share price breaching $10 for the first time early this month. Continued focus on divestitures, as witnessed by the bank’s exit from a Japanese & Chinese joint venture, (see BofA Exits Chinese, Japanese JVs As It Slashes International Exposure) as well as the sale of branches in sparsely populated regions (see Bank of America Sells 29 Branches To Arvest), has gone a long way in helping boost Bank of America’s share price.

See our full analysis for Bank of America

Barclays & RBS

U.K.’s big four banks – Barclays, RBS, HSBC and Standard Chartered – have been dragged into the spotlight once again by British policy makers. The country’s Parliamentary Commission on Banking Standards is pushing for stricter measures than what was recommended by the Independent Commission on Banking (ICB) last September. The ICB had given the banks a breather by proposing a ring-fence for separating their retail & investment banking operations, stopping short of asking for them to be split up completely. Looks like the debate is on again, with banks again staring at the possibility of billions of dollars in additional costs linked with raising and maintaining new capital in case they are split up.

More details about this can be found in our article British Banks Likely To Be Broken Up, Not Just Ring-Fenced

See our full analysis for Barclays | RBS

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Notes:
  1. UBS Faces Probe for Possible Misconduct on Hong Kong Rate, Bloomberg, Dec 20 2012 []
  2. Role of Brokers in UBS Scandal Draws Scrutiny, The Wall Street Journal, Dec 20 2012 []
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