Libor fines could cost banks up to $1.1bn each, Morgan Stanley warns

The banks implicated in the Libor fixing scandal, quickly spreading worldwide, could face individual fines of up to $1.1bn from regulators, according to analysis from Morgan Stanley.

But this may not be the ‘main game’ in the troubled sector in Europe, according to Axa Investment Managers’ fixed income CIO Chris Iggo. He suggests another “collapse of credit”, for Europe’s banks, could be on the cards.

At Morgan Stanley, the bank’s financials analysts examining the immediate, Libor troubles make a ‘base case’ for a 4% to 13% hit to estimated earnings per share this year, with only Barclays and UBS receiving discounts for coming to watchdogs early.

Morgan Stanley’s bull case is a 2% to 9% reduction in this year’s EPS, while its bear case is a 5% to 17% hit to EPS, factoring in the possibility the UK Serious Fraud Office imposes extra fines from its own investigation, started last week.

The estimations come as Barclays senior executive Jerry del Missier speaks today in front of the GB House of Commons Treasury Select Committee about the issue. News broke over the weekend that an internal Barclays memo told staff that it expects the reputational damage it suffered will be “put in perspective” when rivals’ practices become public.

Each of the 16 banks so far named in class action lawsuits could end up paying $400m – if the banks shared the fines equally – but up to $1.1bn individually, if fines are levied in proportion to the banks’ derivatives books, Morgan Stanley says.

The bank analysis team at Credit Suisse says: “The industry has not helped itself – we expect a significant portion of investor focus in the second quarter to be on issues that should not exist, specifically CIO losses and Libor probes.

“Whilst we think that the market may overestimate the potential costs from Libor-related civil litigation, the impact of this issue in terms of regulation should not be underestimated. In the UK, in particular, we think that the LIBOR issue could drive an acceleration and toughening of ring-fencing proposals.”

Chris Iggo, CIO fixed income at AXA Investment Managers suggests news over the longer term for Europe’s banks is not any better.

“In Great Britain the lending business of banks has stagnated in negative territory since the second half of 2010, and in the Eurozone signs have grown in number recently that within a year we could come to a collapse of credit of the banks.

“Through the structurally enforced contraction of balance sheets, the impact of monetary policy instrument lose their relative power.”


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