Deutsche Bank, UBS Profits Battered by Rising Legal CostsNicholas Comfort and Elena Logutenkova
Deutsche Bank AG, Germany’s largest bank, reported a 94 percent drop in third-quarter earnings and UBS AG postponed a profitability goal after setting aside more money for rising legal costs.
Deutsche Bank took a 1.2 billion-euro ($1.65 billion) charge to cover potential legal expenses. UBS shares posted the biggest decline in more than two years 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, was fined 774 million euros today for its involvement in rigging benchmark interest rates, the second-largest penalty in the probe so far 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.”
Deutsche Bank rose 0.9 percent to 36.21 euros in Frankfurt, after initially slumping as much as 3.3 percent. UBS, Switzerland’s largest bank, tumbled 7.7 percent to 17.70 Swiss francs in Zurich.
Lloyds Banking Group Plc, Britain’s biggest mortgage lender, declined 2 percent to 78.01 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 that they didn’t need. 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.
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.
Deutsche Bank’s share price recovery during the course of the day shows some investors have already factored in legal costs in their assessment of the stock, said Lutz Roehmeyer, a money manager at Landesbank Berlin Investment who helps oversee about 11 billion euros, including Deutsche Bank shares.
“Some Deutsche Bank investors were caught on the wrong foot with the size of the provisions,” Roehmeyer said from Berlin today. “Others are saying it was clear settlements would be coming and it doesn’t make a whole lot of difference whether the reserves are now 1.2 billion euros higher.”
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.
Deutsche Bank is trying to put litigation behind it, Chief Financial Officer Stefan Krause said on a conference call with analysts. The company is interviewing about 50 employees as it investigates whether traders tried to rig rates, a person familiar with the matter said last week. Deutsche Bank has also said that its own internal probe into Libor indicates no wrongdoing by current or former management board members.
Investigators are also probing the possible manipulation of the $5.3 trillion-a-day foreign-exchange market. Bloomberg News reported in June that traders at some banks said they shared information about their positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates, which determine what many pension funds and money managers pay for their foreign exchange.
Deutsche Bank said it was co-operating with requests for information from regulators. The lender is the biggest foreign exchange trader, accounting for 15 percent of the market, according to a May survey by Euromoney Institutional Investor Plc. UBS has about 10 percent of the market.
Germany’s largest lender also said it’s cooperating with regulators probing repurchase transactions it arranged for Banca Monte dei Paschi di Siena SpA, Italy’s third-largest bank. Deutsche Bank is contesting allegations of fraud and negligence. Italian prosecutors are also probing other unrelated transactions, it said.
Deutsche Bank also faces probes and lawsuits related to its origination and sale of mortgage-backed securities. The lawsuits allege the bank misrepresented the products. It has said that it is cooperating with regulators.
JPMorgan Chase & Co. agreed last week to pay $5.1 billion to settle a U.S. regulator’s claims related to home loans and securities the firm sold to mortgage finance companies Fannie Mae and Freddie Mac, resolving part of a $13 billion accord the firm is negotiating with the government. The bank reported its first quarterly loss under CEO Jamie Dimon, 57, earlier this month after taking a $7.2 billion charge to cover the cost of mounting litigation and regulatory probes.
Deutsche Bank, UBS, Lloyds, BNP Paribas SA, HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Barclays Plc, Societe Generale SA, Credit Agricole SA and Julius Baer Group Ltd. face about $39 billion in future litigation costs to settle various claims and regulatory probes, Credit Suisse Group AG analysts led by Amit Goel estimated in a February report.
UBS, Switzerland’s biggest bank, said its target to reach a 15 percent return on equity in 2015 will be delayed by at least a year unless the Swiss regulator lifts an order that UBS hold more capital.
“There is no single item that we can point to that brought this decision,” CEO Sergio Ermotti, 53, said in an interview with Bloomberg Television, referring to the order to increase capital for operational risks. “It’s a variety of reasons and it’s a temporary measure. We will work hard to take this add-on away.”
UBS reported third-quarter net income of 577 million Swiss francs ($644 million) compared with the 561 million-franc average estimate of 12 analysts surveyed by Bloomberg. A 222 million-franc tax benefit helped cushion 586 million francs in provisions for litigation and regulatory matters.
The Swiss bank said it’s taking measures against individuals as it conducts an internal review of its foreign-exchange business. The firm didn’t identify or quantify the number of employees involved or specify what actions it took.
The Swiss regulator’s demand for more capital is a setback for Ermotti, who decided to exit most debt-trading businesses at the investment bank last year to boost returns. The bank, which paid about 3 billion francs in fines and settlements for litigation in the past year, said it expects “elevated charges” for legal and regulatory matters through 2014.
The Swiss Financial Market Supervisory Authority’s demand adds about 28 billion francs to UBS’s risk-weighted assets and reduces the Basel III common equity ratio by 130 basis points as of Oct. 1 from 11.9 percent at the end of September, UBS said.
Examining the bank’s internal models is one of Finma’s core tasks and the regulator can impose surcharges if results from internal models don’t correspond to a conservative assessment of potential risks or empirical evidence, said Tobias Lux, a spokesman. He declined to elaborate on the specific demands for UBS or say whether Finma has made similar demands to Credit Suisse. A Credit Suisse spokesman, Marc Dosch, declined to comment.
UBS still expects to be able to boost its Basel III common equity ratio to more than 13 percent in 2014. The regulator’s demands for higher risk weightings to be assigned to litigation and compliance matters will be partially offset by the boost in capital the bank will get from repurchasing a fund from the Swiss National Bank.
Reaching that capital target is at top of the bank’s agenda for next year, Ermotti said. UBS plans to start paying out more than 50 percent of profits as dividends after it reaches the capital target.
The bank’s plan to buy back the SNB’s fund, which was used to wind down UBS’s toxic assets from the subprime crisis, will add 100 basis points to the capital ratio, more than the company previously estimated, as the fund’s assets have shrunk to 1 million francs. A basis point is equivalent to one hundredth of a percentage point.