NEW YORK (TheStreet) -- Global investment banks still underestimate litigation risk and are likely to face another $50 billion to $70 billion in mortgage-related fines and settlement costs, according to a report published Monday by UBS.
"Those banks that quantify litigation risk do so at a modest 2-4% of market capitalization. However this quantification only captures litigation risk that is both reasonably possible and estimable (banks expense all litigation that is both probable and estimable) and we think it understates the risk to shareholders," wrote a team of six UBS analysts based in New York, London and Zurich. Their own estimate "incorporates a more severe downside" including a roughly 5% hit to the earnings over the next five quarters and an approximately 6% hit to valuation, the report states.
The UBS analysts argue LIBOR-related fines are largely in the rear view mirror, though they concede at the same time class-action risk tied to LIBOR is "harder to quantify." On the other hand, the mortgage-related risks remain, they argue. They see Bank of America (BAC) and Royal Bank of Scotland Group (RBS) as most exposed on this front. However, while they believe Bank of America has "provided for a large portion of potential litigation risk, the same is not true for RBS, which is at an early stage of the judicial process."
UBS's analysts also cite a report from the London School of Economics, which contends banks have paid about $235 billion, or 20% of the market cap, between 2008-2012 tied to misconduct. That number may be light, UBS's analysts argue, since they note it leaves out some key players, the most notable of which is Deutsche Bank (DB).
