BNP Fine Shows Risks for Banks Ensnared in Litigation

A potential $10 billion fine levied against BNP Paribas SA for breaking U.S. sanctions highlights the risk of investing in European banks grappling with litigation costs across the globe.

“Legacy litigation risk has become a primary factor in share-price performance,” Credit Suisse Group AG analysts said in a research note today. The divergence in performance of affected banks will widen further, the report said.

Europe’s biggest investment banks, which have underperformed the Bloomberg Europe Banks & Financial Services Index since October, are facing lawsuits and regulatory probes for allegations that stretch to misselling mortgages and manipulating currencies and benchmark interest rates. The firms face $66 billion of additional legal costs, taking the total bill to $104 billion, Credit Suisse estimated in its report, written by analysts including Amit Goel in London.

Deutsche Bank AG has slumped 19 percent, Barclays Plc 12 percent, Credit Suisse 11 percent, and BNP Paribas 5.5 percent since Oct. 22. The 43-member Bloomberg index increased 2.2 percent in the period.

Standard & Poor’s said it may downgrade BNP’s A+ credit rating depending on the size of the fine. The U.S. penalty would be greater than the average estimate for profit this year of 5.64 billion euros ($7.7 billion) among 13 analysts. It follows a $2.6 billion fine for Credit Suisse last month for helping American clients dodge taxes.

Credit Suisse advised clients to “await a better entry point” to buy shares of BNP, said Barclays’s weak capital position will weigh on its strategic plan, and said compounding issues at HSBC Holdings Plc “create significant tail risks.”

Legal ‘Nightmare’

U.S. authorities are seeking penalties to settle allegations that BNP transferred funds for clients in violation of American sanctions against Sudan, Iran and Cuba, according to people with knowledge of the investigation. French Foreign Minister Laurent Fabius said yesterday the potential $10 billion fine would be unreasonable.

Union Investment GmbH, Deutsche Bank’s 12th-largest shareholder, said last month it was among investors growing impatient over the cost of legal bills, asking “when will this nightmare finally end.”

Litigation cost the Frankfurt-based bank 3 billion euros last year and it announced on May 18 plans to raise 8 billion euros from investors to bolster capital and meet stricter regulatory standards.

Forsaking Bonus

Barclays, which is mired in probes that also include selling insurance that clients didn’t need, will start cutting hundreds of jobs at its investment bank this week to lower costs, people with knowledge of the matter said. Chief Executive Officer Antony Jenkins forsook his 2013 bonus after acknowledging that penalties and lawsuits continued to hurt the bank’s finances after it raised 5.8 billion pounds ($9.7 billion) from shareholders last year.

BNP’s U.S. fine could affect the bank’s creditworthiness, including its risk-weighted capitalization, and disrupt some banking activities, S&P said in a report today.

Before it's here, it's on the Bloomberg Terminal.