European lenders takes scandal hit

The spreading scandal over the manipulation of key lending rates and the downturn of Europe’s economy took their toll on two of the region’s leading investment banks, Deutsche Bank and UBS, which both revealed increased litigation estimates and sharp profit falls.
Both banks are caught up in the scandal around the alleged manipulation of the London Interbank Offered Rate and related benchmark lending rates and yesterday topped up their estimates for litigation risk by a combined €580m. This reflects in part the expected costs of settling regulatory probes around the world.
Barclays last month paid £290m to settle its case with regulators in the UK and US over the Libor affair in a move that led within days to the resignation of the bank’s top three directors, including Bob Diamond, chief executive.
The dual impact of recent banking scandals, including the Libor affair, and struggling profitability has led to a crisis of confidence in the sector. Sentiment has been particularly bleak in Europe, amid growing anxiety that the eurozone crisis will worsen in coming months.
In the three months to the end of June, Deutsche increased its estimate on unprovisioned litigation costs from €2.1bn to €2.5bn, while UBS added SFr210m ($215m) to its litigation and regulatory provisions.
Both banks revealed more information about their potential exposure to the issue. UBS said the Libor affair had been taken up by attorneys-general in several US states, in addition to regulators and the US Department of Justice. Deutsche said it was being sued over claims that it manipulated the Yen Libor rate and the price of derivatives tied to the Euroyen benchmark in a suit filed by US litigants in April.
Both banks were also hit by the impact of the economic downturn, with net profits for the three months to June falling 58 per cent at UBS and 46 per cent at Deutsche.
“The current environment continues to result in significantly lower levels of client activity, both in investment banking as well as in certain parts of our retail business,’’ Deutsche Bank said. “We expect this to continue in the second half of the year.’’
The hits were hardest in investment banking, as clients reduced business volumes dramatically, particularly in equities trading. Second-quarter profits at Deutsche’s investment bank fell nearly two-thirds to €357m. At UBS, operating income in investment banking tumbled from SFr2.9bn to SFr1.7bn, with the unit generating a pre-tax loss of SFr130m, thanks to a one-off hit of SFr349m from the botched flotation of Facebook.
UBS said it would take legal action against Nasdaq over the affair, which left brokers with excess supplies of shares when orders were duplicated