European Banks Seen Facing $50 Billion More in Legal Expenses

Jul 07, 2014 6:12 am ET

July 7 (Bloomberg) -- Europe’s banks face a further $50 billion of legal costs as they catch up with their U.S. counterparts, according to analysts at Morgan Stanley.

European firms, which have set aside or paid out more than $80 billion since 2009, face about $130 billion of litigation and settlement costs in total, analysts led by Huw van Steenis wrote in a note to clients today. U.S. firms, which have so far made provisions for or paid out $125 billion, may have only to set aside a further $25 billion, the analysts said.

Barclays Plc and Royal Bank of Scotland Group Plc face the largest increases in legal costs among European banks, van Steenis wrote. Barclays, Britain’s second-largest bank, will have about $11.9 billion of additional legal costs through 2016, compared with the $10 billion it’s already set aside or paid out since 2009. RBS’s legal bills may rise by $11.3 billion over the same period from $11.7 billion, he added.

Penalties for misconduct have escalated in recent weeks with France’s BNP Paribas SA paying a $8.97 billion fine for U.S. sanctions violations and Credit Suisse Group AG paying $2.6 billion to end a three-year U.S. tax probe. Firms may also start to reach settlements in the global investigation into the rigging of foreign-exchange markets as soon as this year, van Steenis added, cited his conversations with bank executives. Fines are likely to hurt the industry’s ability to pay dividends in coming years, he wrote.

Securities firms also face dwindling revenue from trading fixed-income, currencies and commodities, or FICC, with sales falling as much as 25 percent in the second quarter from the year-earlier period, according to Morgan Stanley.

European firms, especially Barclays and Credit Suisse, will continue to retrench as they reorganize and adjust to tighter rules on capital and leverage, enabling U.S. firms to expand their market share in FICC, the analysts wrote. That competition from the U.S. is also adding to pressure on margins, according to the Morgan Stanley analysts.