Libor Fine May Force UBS to Slash Previously Safe Bonuses

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Bonuses at UBS looked safe earlier this year, despite the bank's CHF3.3bn restructuring charge related to its  'strategic acceleration,' as it had accrued CHF1.5bn for new bonuses this year. One senior UBS banker told us then that the bank planned to avoid the mistake of 2008, when the investment banking bonus pool was slashed by 80%  and numerous UBS bankers left.

Unfortunately for UBS bankers, the 2012 the bonus pool is likely to be slashed as a result of an anticipated alleged fine of $1bn for the bank's involvement in the scandal surrounding manipulation of the London Interbank Offered Rate.

"It's a lot of money and bonuses will probably be affected," says Dirk Becker at Kepler Capital Markets, although, he adds, "it's not clear whether this will be taken out of bonuses." UBS isn't commenting on the alleged fine.

"UBS aren't one of the big bonus payers anyway," Becker adds. "Even when they paid bonuses over the past few years they still lost market share and momentum in their investment banking business. I was never expecting them to pay a lot even before this fine."

It's not just this year's bonuses that are at risk. Under UBS's equity ownership plan, 10%-50% of previous years' deferred equity bonuses are clawed back if the area of the bank in which the recipient works makes a loss. During the first nine months of 2012, UBS's investment bank made a loss of CHF3bn. Bonuses were always going to be clawed back anyway. The new fine simply makes it more likely that clawbacks will be at the upper end of the scale.

Not everyone thinks this latest development will be fatal for the UBS bonus pool, however. Chris Wheeler, an analyst at Mediobanca, says the fine is undoubtedly bigger than UBS had budgeted for and is therefore likely to impact investment banking pay. However, he also suggests that UBS will want to protect the bonus pool as much as possible. "My guess is that this is such a high profile case that the investment bank will be punished, but I suspect they will try not to hit the investment banking bonus pool too much. They are laying off staff and need to maintain morale - people are already leaking things to the press," Wheeler says.

Wheeler also points out that UBS's managerial revolving door could act in its favour as far as Libor is concerned.  "Libor manipulation happened between 2002 and 2008 - before all the current management were in place. Since then, they have had three CEOs, three heads of investment banking and two new finance directors," he says. "They won't want to punish current management too much for something that happened before their time."

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