ZURICH (REUTERS) - The cost of cleaning up the banking industry dominated third-quarter results from Deutsche Bank and UBS on Tuesday, with both banks taking unexpected hits for potential legal costs that overshadowed their day-to-day performance.

Deutsche, Germany's largest bank, set aside an extra 1.2 billion euros (S$2.05 billion) to deal with potential litigation costs, depressing its quarterly pretax profit to 18 million euros against an expected 642 million euros.

Swiss rival UBS' third-quarter net profit of 577 million Swiss francs (S$798.3 million) beat the 537 million-franc 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 recently 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 Ms Andrea Williams, European equities fund manager at Royal London Asset Management, referring to the news from UBS. "I don't think anybody anticipated the regulator required more capital."

Deutsche's litigation reserves - its war chest to deal with potential legal costs - stands at 4.1 billion euros 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, JPMorgan and Citigroup, are under investigation by regulators over the possible manipulation of benchmark rates, including the London interbank offered rate, known as Libor, which are used to price trillions of dollars' worth of loans.

Unlike rivals Barclays and UBS, Deutsche has not yet reached a settlement over the allegations. "The investigations under way have the potential to result in the imposition of significant financial penalties and other consequences for the bank," Deutsche 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".