Deutsche Bank, UBS profits battered by rising legal costs

Source: Bloomberg Source: Bloomberg

Deutsche Bank AG, Germany’s largest bank, reported a 94% drop in third-quarter earnings and UBS AG postponed a profitability goal after setting aside more money for rising legal costs.

Deutsche Bank fell as much as 3.3% in Frankfurt trading after taking a 1.2 billion-euro ($1.65 billion) charge to cover potential legal expenses. UBS shares posted the biggest intraday decline in almost 15 months after the Swiss regulator demanded it hold more capital for litigation risks.

Regulators have taken a tougher stance against misbehavior since the financial crisis of 2008. Rabobank Groep, the Dutch cooperative lender, said today it was fined about 774 million euros for its involvement in rigging benchmark interest rates, the second-largest penalty after UBS. Deutsche Bank is among firms still under investigation. UBS and Deutsche Bank also set aside funds in the third quarter for lawsuits tied to the U.S. housing market and said authorities have requested information in a probe into the manipulation of currency rates.

“Deutsche Bank is sizing up legal costs while UBS is being told by its regulator to reflect greater risk, specifically from known and unknown litigation,” Dieter Hein, a banking analyst at Fairesearch GmbH in Kronberg, Germany, said by phone. “Investment banks have yet to get a handle on this, otherwise they wouldn’t be adding to their reserves quarter after quarter.”

Lloyds, Nomura

Deutsche Bank declined 0.6% to 35.67 euros by 2:25 p.m. in Frankfurt, while UBS, Switzerland’s largest bank, tumbled 6.8% to 17.87 Swiss francs in Zurich.

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, declined 1.7% to 78.30 pence in London after its third-quarter earnings were also hurt by escalating one-time items. The London-based bank posted a 1.3 billion-pound ($2.1 billion) loss in the period after setting aside 750 million pounds more to compensate clients sold payment-protection insurance that didn’t cover them or they didn’t. In all, the lender has made about 8.1 billion pounds of provisions for PPI.

On a busy day for bank earnings, Nomura Holdings Inc. reported that quarterly profit rose less than analysts estimated as demand for Japanese stocks waned, signaling an earnings boom stemming from Prime Minister Shinzo Abe’s economic stimulus may be losing momentum. Net income at Tokyo-based Daiwa Securities Group Inc. more than quadrupled in the quarter, in line with analysts’ estimates.

Size ‘Surprising’

At Deutsche Bank, third-quarter net income fell to 41 million euros from 747 million euros a year earlier, the Frankfurt-based bank said today, missing analysts’ estimates. Co-Chief Executive Officers Anshu Jain, 50, and Juergen Fitschen, 65, boosted reserves for legal costs to 4.1 billion euros in the quarter. The 1.2 billion-euro increase was almost four times the average estimate of analysts surveyed.

“The size of the litigation charge was surprising,” Andrew Stimpson, an analyst at Keefe, Bruyette & Woods who has an outperform rating on Deutsche Bank shares, said by telephone from London. “Hopefully they will report settlements soon. Once that happens, investors can relax somewhat.”

Regulators are investigating whether more than a dozen lenders colluded to rig the London interbank offered rate, or Libor. Including Rabobank, five firms have been fined more than $3.6 billion for benchmark-rigging.

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