By Karen Freifeld and Michael Shields
NEW YORK/ZURICH (Reuters) - UBS Group AG, Switzerland's largest bank, faces another potentially costly legal battle as the U.S. Department of Justice draws up civil charges over the sale of mortgage-backed securities in the run-up to the 2008 financial crisis.
UBS said on Wednesday it expected to be sued by the Justice Department as early as Thursday. The bank said the claims were not supported by the facts or the law and it would contest any complaint vigorously.
Analysts at Zuercher Kantonalbank said it was unclear how long the U.S. legal case might last and that it was hard to estimate what size fine UBS might face.
"It strikes us as important, though, that the matter is brought to a quick conclusion so that clarity prevails," it said in a research note, keeping its "market weight" recommendation.
The analysts said they thought more than half of the 1.2 billion Swiss francs ($1.20 billion) UBS has set aside for non-core legal risks was dedicated to the U.S. case.
UBS said in its statement on Wednesday it expected the DOJ to seek unspecified monetary penalties stemming from mortgage securities which date back to 2006 and 2007.
UBS shares rose 1 percent in morning trading, in line with the European banking sector index (.SX7P).
The potential U.S. action is one of the last that deals with alleged misconduct in the sale and pooling of mortgage securities which helped to cause the financial crisis.
Vontobel analysts said UBS's relatively modest role in the mortgage-backed securities market stood in stark contrast to that of rival banks which had already settled with U.S. authorities.
The DOJ has settled similar claims with Citigroup Inc, Deutsche Bank, JPMorgan Chase & Co, Credit Suisse Group, Morgan Stanley, Goldman Sachs, Bank of America Corp and Barclays Plc.
Barclays reached a $2 billion settlement in March, one of the lower payouts by banks facing such claims. The British bank had resisted a penalty proposed in initial settlement negotiations, something UBS has also done.
HSBC Holdings Plc agreed to pay $765 million in October to settle with the Justice Department over its sale of defective mortgage securities, while Royal Bank of Scotland Group Plc, a big player in the mortgage-backed market, reached a $4.9 billion deal in May.
UBS originated $1.5 billion of U.S. residential mortgages in a $5 trillion market and lost more than $45 billion when the housing market collapsed, a person familiar with the matter told Reuters.
In a court case in France, which UBS has chosen not settle, the bank is fighting money laundering and tax fraud charges over allegations it helped wealthy clients avoid taxes in France. UBS denies the charges.
If found guilty of money laundering, UBS could be fined up to 5 billion euros ($5.71 billion). It could also face damages awarded to the French taxman for the missing revenue, while its executives risk jail time.
The French state has asked for 1.6 billion euros in damages, which UBS has called excessive.
During the French investigation, UBS turned down a settlement offer of 1.1 billion euros made by the authorities, judicial sources have said.
($1 = 1.0017 Swiss francs)
($1 = 0.8750 euros)
(Additional reporting by Angelika Gruber in Zurich; Editing by Jane Merriman)