By Steve Slater and Matt Scuffham
LONDON (Reuters) - European banks' potential losses from private lawsuits related to interest rate rigging could be materially lower after a U.S. judge dismissed a large portion of such claims last week.
Some of the world's largest banks, including Britain's Barclays <BARC.L> and Royal Bank of Scotland <RBS.L>, Switzerland's UBS <UBSN.VX> and Germany's Deutsche Bank <DBKGn.DE> were facing claims totalling billions of dollars in the U.S. case, which had been considered the biggest civil legal threat that they faced.
A range of private plaintiffs, from bondholders to the city of Baltimore, had accused 16 banks of conspiring to manipulate the London Interbank Offered Rate (Libor), a key benchmark used to price more than $550 trillion (361.93 trillion pounds) in financial products.
"Given that any loss estimate is still more art than science, investors need to bear in mind that civil litigation risk from Libor could still be material, but is less likely to completely change the investment case than before," said Chintan Joshi, analyst at Nomura in London.
He said the outcome appeared to be substantially in favour of the banks involved, particularly regarding the potential for longer-term losses.
Three banks have so far settled with U.S. and UK regulators, and all are European - Barclays, UBS and RBS. They have paid $2.6 billion in civil penalties.
UBS succeeded on Tuesday in sealing documents in two cases brought by traders fired by the bank during its investigation into rate manipulation.
Other European banks may face civil fines, and there has been concern that payouts on class action lawsuits could easily exceed civil penalties.
Europe's bank sector <.SX7P> was up 0.7 percent by 1045 GMT, after a Monday public holiday. Deutsche Bank shares were up 1.3 percent, Barclays was up 1 percent, UBS shares were up 0.2 percent and RBS was down 0.2 percent.
Liberum Capital analyst Cormac Leech cautioned the legal process would be drawn out and that the plaintiffs could amend their suit or appeal the ruling.
"The ultimate payout for the banks remains highly uncertain in my view. I currently assume around 1 billion pounds ($1.5 billion) for Barclays and RBS, but it could potentially be two to four times that," he said.
Barclays, RBS, HSBC <HSBA.L>, Deutsche Bank, UBS and Credit Suisse Group AG <CSGN.VX> all declined to comment.
Claims have come from large investors, local governments, home owners claiming rate rigging made their mortgages more expensive and small U.S. banks that have filed lawsuits accusing their big cousins of collusion.
The threat of hefty class action payouts has hung over the industry because the manipulation of Libor casts doubt on every contract that has used it as a reference point, potentially affecting commercial borrowers with loans linked to Libor, investors holding portfolios of floating rate securities, or savers being paid a rate of interest referencing Libor.
The U.S. federal watchdog in December estimated mortgage lenders Fannie Mae and Freddie Mac, which had to be bailed out during the 2007/08 financial crisis, could have lost more than $3 billion as a result of Libor manipulation.
Assessing the level of potential payouts is complex, however, as Libor rates are calculated by averaging out bank submissions and stripping out the highest and lowers outliers, making it harder to prove any individual bank caused a loss.
Credit Suisse analysts, in an in-depth assessment of litigation risk facing banks released last month, estimated 10 European banks face a cost of about $571 million for class action lawsuits, or 10 percent of the $5.7 billion in civil fines they are likely to pay.
Credit Suisse said plaintiffs were likely to have a higher chance of success if they could prove they incurred losses where there was evidence that banks jointly manipulated rates.
(Reporting by Matt Scuffham and Steve Slater; Editing by Carmel Crimmins and Helen Massy-Beresford)