Zurich / Frankfurt - 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 Bank, Germany’s largest lender, set aside an extra e1.2 billion (R16.3bn) to deal with potential litigation costs, depressing its quarterly pretax profit to e18 million against an expected e642m.
Swiss rival UBS’s third-quarter net profit of Sf577m (R6bn) beat the Sf537m 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.
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 has forced rivals like JPMorgan and Rabobank to set aside billions of dollars for lawsuits and fines.
“Just as we thought the regulation might be over, back it comes,” said Andrea Williams, a fund manager at Royal London Asset Management, referring to UBS. “I don’t think anybody anticipated the regulator required more capital.”
Deutsche Bank’s litigation reserves – its war chest to deal with potential legal costs – stands at e4.1bn 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 Bank, JPMorgan and Citigroup, are under investigation by regulators over the possible manipulation of benchmark rates, including the London interbank offered rate, that are used to price loans worth trillions of dollars.
Unlike rivals Barclays and UBS, Deutsche Bank has not yet reached a settlement over allegations. “The investigations under way have the potential to result in the imposition of significant financial penalties and other consequences for the bank,” it said in its third-quarter report.
In Zurich, UBS said its financial regulator, Finma, was forcing the bank to hold extra capital to deal with heightened operational risk related to “known or unknown litigation, compliance and other operational risk matters”.
The measure meant the bank’s target of achieving a 15 percent return on equity (ROE) by 2015 would be pushed back by at least a year, UBS said.
“Consensus did not price in the 15 percent ROE target, so that’s less of a worry,” said Kian Abouhossein, a London-based banking analyst with JPMorgan who rates the stock “overweight”. “The real worry is that there are more litigation charges.”
Several regulators have recently launched investigations into the potential manipulation of foreign exchange markets, and UBS said it was also conducting an internal review.
“We have taken and will take appropriate action with respect to certain personnel as a result of our review, which is ongoing,” it said, without elaborating.
Matt Spick, a London-based analyst at Deutsche Bank who rates UBS as a “buy”, said the potential for Finma to require UBS to hold additional capital to cover litigation risk had “absolutely not” been expected.
UBS repeated its commitment to paying out 50 percent of profits once it hits a common equity tier one ratio, under Basel 3 rules, of 13 percent, expected next year, but analysts remained wary of it achieving this milestone. – Reuters