Top banks’ results affected by the big clean-up

THE cost of cleaning up the banking industry dominated third-quarter results from Deutsche Bank and UBS yesterday, with both banks taking unexpected hits for potential legal costs that overshadowed their day-to-day performance.

Deutsche, Germany’s largest bank, set aside an extra 1.2bn euros to deal with potential litigation costs, depressing its quarterly pre-tax profit to 18m euros against an expected 642m.

Swiss rival UBS’s third-quarter net profit of 577m Swiss francs beat the 537m forecast, but the bank said it would miss a key medium-term profit target because its financial regulator was forcing it to hold extra capital to deal with potential litigation costs.

Sign up to our Business newsletter

Sign up to our Business newsletter

Both litigation hits show the uphill struggle Europe’s banks still face to cast off the shadow of scandals revealed in the wake of the financial crisis, a hangover that recently forced rivals like JP Morgan and Rabobank to set aside billions of dollars for lawsuits and fines.

US and European regulators ordered Dutch lender Rabobank to pay $1.07bn to settle allegations it aided a scheme to rig benchmark interest rates, imposing the fifth fine in a scandal that has helped to shred faith in the financial industry.

“Just as we thought the regulation might be over, back it comes,” said Andrea Williams, European equities fund manager at Royal London Asset Management, referring to the news from UBS.

“I don’t think anybody anticipated the regulator required more capital.”

Deutsche’s litigation reserves – its war chest to deal with potential legal costs – stands at 4.1bn euros after the charges booked in the third quarter. “We expect the litigation environment to continue to be challenging,” the bank said in a statement, signalling that the worst may not be over.

More than a dozen banks and brokerages, including Deutsche, JP Morgan and Citigroup, are under investigation by regulators over the possible manipulation of benchmark rates – including the London interbank offered rate, known as Libor – which are used to price trillions of dollars’ worth of loans.

Unlike rivals Barclays and UBS, Deutsche has not yet reached a settlement over allegations. “The investigations underway have the potential to result in the imposition of significant financial penalties and other consequences for the bank,” Deutsche said.

UBS said its financial regulator was forcing the bank to hold extra capital to deal with litigation.