When we discussed the next steps from the Lieborgate fallout, we made it explicitly clear that one after another experts will come to the fore with their predictions on the monetary fallout of Lieborgate, and how much various banks will be on the hook for: basically an exercise in futility as there is no way to even remotely extrapolate what the liability is to manipulating $500 trillion worth of IR-derivative notional. The bulk of these analyses have been of the lowballing variety, designed to create a "framing" limit for the Libor liability within a given mental range, when in reality the number could and likely will be orders of magnitude greater, but what bank wants ambulance chasing to go off the charts and be sued by anyone who was exposed to debt instruments in the past decade - read mortgage or credit card? One firm which dares to break away from the framing mold is Australian bank Macquarie which has thrown out the simply stunning number of $176 billion. If true: prepare for the banks' Tobacco moment as well over half of the market cap of global financial institutions who just so happens have exactly $0.00 in litigation reserves for just this contingency, is slashed.
Libor: a $176bn risk. We lower our target prices by an average of 12%
Our analysis highlights clear evidence that Libor was “low-balled” during the financial crisis. We estimate that investors in Libor-linked assets potentially incurred losses of $176bn. Including both regulatory fines and possible civil class action liabilities, we think the eventual bill for Libor panel banks could total $88bn.
We think it will be hard for claimants to show that individual banks were more culpable than others in “low-balling” Libor submissions, and instead we focus on panel membership as the likely key determinant of future liabilities. Based on this methodology, we assess the following potential claim exposures:
- $8.3bn pre-tax for BARC, DBK and UBS
- $7.7bn pre-tax for CS
- $1.8bn pre-tax for SG
- $0.6bn pre-tax for BNP
We adjust our target prices as follows, allowing for existing litigation deductions as well as potential additional regulatory fines:
- DBK lowered by 22% from €30 to €23.5 (also incorporating changes related to today’s 2Q results; 16% lower for Libor-only)
- BARC lowered by 17% from £2.00 to £1.66
- CS lowered by 13% from CHF19 to CHF16.5
- UBS lowered by 11% from CHF14 to CHF12.5
- SG lowered by 8% from €18 to €16.5
- BNP lowered by 2% from €30 to €29.5
We retain our existing recommendation stance, with UBS maintained Outperform, CS, BNP and SG maintained Neutral, and DBK and BARC maintained Underperform.