By Matt Scuffham and Steve Slater
LONDON (Reuters) - Grim investment bank revenues, a mixed economic backdrop and increasing regulatory and legal concerns are set to weigh on results from three of Europe's biggest banks on Tuesday.
But Britain's biggest domestic lender Lloyds Banking Group (LLOY.L) will buck the trend by reporting a sharp rise in third-quarter profit, benefiting from the improving health of the UK economy.
European banks are set to echo the grim performance shown by Wall Street's big banks in fixed income, where revenues - which account for about half of total investment bank income - were down about 15 percent on average from a year ago.
Banks in Europe could fare even worse, analysts said, a downturn that could intensify scrutiny on how far Deutsche Bank (DBK.DE) and UBS (UBS.VX) are shrinking and realigning their investment banking arms.
Deutsche Bank is expected to say its third-quarter pretax profit fell 43 percent to 642 million euros ($886 million), a Reuters poll showed.
The Frankfurt-based lender warned investors in September that investment banking revenue would be significantly lower in the third-quarter, blaming a slowdown in sales and trading of debt products. It normally derives about 55 percent of its investment bank revenue from fixed income, currencies and commodities.
Deutsche has also warned it will have to set aside more money to deal with litigation. Unlike rivals Barclays (BARC.L) and UBS, it has not yet reached a settlement over allegations it was involved in a scam to manipulate global benchmark inter-bank lending rates.
UBS is seen swinging to a third-quarter net profit of 537 million Swiss francs ($600.6 million), a Reuters poll showed, from a year-ago loss of more than 2.1 billion that reflected a 3.1 billion franc restructuring charge, as well as 863 million francs in charges on the value of its own debt.
Booking the loss last October it also announced a three-year plan to cut 10,000 investment bank staff by withdrawing from large parts of fixed income.
The move means UBS will focus almost exclusively on catering to wealthy clients at its private bank, but investors are still looking for proof of the Swiss bank's progress.
Lloyds, 33 percent owned by the UK government and focused on lending to the domestic economy, is expected to report third-quarter underlying pretax profit of 1.5 billion pounds, up from 831 million the year before, according to a Reuters poll.
The performance reflects an improved net interest margin - the difference between the rate it offers to savers and the rate it charges borrowers - and a decline in customers being unable to pay back loans.
Shares in Lloyds have risen by 69 percent this year to a near four-year high, enabling the government to start offloading the shares it picked up through a 20.5 billion pound bailout of the bank during the 2008 financial crisis.
Lloyds is in talks with Britain's financial regulator about the possibility of restarting dividend payments next year. It has been selling assets and slimming its international business to strengthen its capital position and is targeting a core Tier 1 ratio, taking into account new Basle III capital rules, of above 10 percent by the end of the year.
The bank may, however, have to increase the funds it has set aside to compensate customers mis-sold loan insurance and complex interest-rate hedging products. It already expects to pay out 7.3 billion to customers wrongly sold payment protection insurance (PPI), the most of any bank.
Meanwhile a trading update from Standard Chartered (STAN.L) is expected to reflect a weak third quarter due to difficult investment banking activity, slowing loan growth and a significant currency drag, as weak Indian and Indonesian currencies translate into lower reported U.S. dollar earnings.
Its shares have been hit by concerns about a slowdown in Asia derailing its decade-long growth and are down 3 percent this year, one of the worst performing bank stocks in Europe.
The bank has said it expects to deliver a 2013 operating profit of about $7.9 billion, up 15 percent from last year.
(Additional reporting by Ed Taylor and Katharina Bart; Editing by David Holmes)