Zurich - Deutsche
Bank said it reached a $7.2 billion agreement to resolve a years-long US
investigation into its dealings in mortgage-backed securities, removing a legal
hurdle that fuelled investor angst.
Deutsche Bank
will pay a $3.1 billion civil penalty and provide $4.1 billion in relief to
consumers under a settlement in principle with US authorities, according to a
statement early Friday. The fine will cut pretax profit by $1.2 billion this
quarter as the firm taps existing legal reserves to blunt much of that cost.
The relief may drag on earnings for years.
The deal is far
below the Justice Department’s initial request of $14 billion, which had
spooked stock and bond holders earlier this year, rattling entire markets. The
agreement reached by negotiators will probably spare the bank from having to
raise capital, said George Boubouras, the chief investment officer of
Melbourne-based Contango Asset Management.
“It’ll be a
relief to investors,” said Boubouras, whose firm oversees about A$650 million
($470 million) of equity investments.
Ahead of
Friday’s statement, analysts at Keefe, Bruyette & Woods had estimated a
fine exceeding $9 billion would cause the bank’s capital to fall to dangerous
levels requiring action.
Tapping reserves
Germany’s
biggest bank still faces US probes into other matters and potentially expensive
civil suits - liabilities that CEO John Cryan has set out to resolve as he
seeks to restore confidence.
Deutsche Bank
had set aside 5.9 billion euros ($6.2 billion) for all of its outstanding legal
costs as of September 30, when its common equity Tier 1 ratio, a measure of
financial strength, stood at 11.1 percent. The bank targets a level of at least
12.5 percent in 2018. Each $1 billion of litigation costs not covered by
provisions would lower the ratio by 20-25 basis points, Bloomberg Intelligence
analyst Arjun Bowry has estimated.
Read also: Regulator ends Deutsche Bank probes
Friday’s
statement indicates that about $2 billion of the stockpile was earmarked for
the mortgage-securities case. The consumer relief doesn’t have to be
provisioned in the same way as the civil penalty because it will be provided
through loan modifications or other assistance over five years or more. In
other settlements, banks haven’t typically booked immediate charges for
relief, instead incurring costs as a longer-term drag on profits.
“The financial
consequences, if any, of the consumer relief are subject to the final terms of
the settlement, and are not currently expected to have a material impact on
2016 financial results,” the bank said in its statement.
In a related
case, the Justice Department sued Barclays for fraud over its sale of mortgage
bonds after the bank balked at paying the amount the government sought in
negotiations. The lawsuit announced on Thursday is rare for big banks, which
typically settle with the government rather than risk drawn-out litigation and
a possible trial.
Mortgage probes
The Obama
administration is pressing to wrap up investigations of Wall Street firms for
creating and selling the subprime mortgage bonds that fuelled the 2008
financial crisis. Authorities have already extracted more than $46 billion in
fines from six US financial institutions over their dealings in mortgage-backed
securities. Bank of America Corp., which had the largest such settlement,
agreed to pay $16.7 billion over bonds that were worth four times those of
Deutsche Bank.
Deutsche Bank
said in September that the Justice Department had made the opening $14 billion
request and that executives had no intention of paying that amount. The news
spurred concern about whether the firm had enough capital, roiling markets
around the world while pushing the company’s stock to a record low. The shares
doesn’t resolve probes into whether Deutsche Bank manipulated foreign-currency
rates and precious metals prices and whether it facilitated transactions that
helped investors illegally transfer billions of dollars out of Russia. Deutsche
Bank also faces civil lawsuits related to claims that its traders manipulated
key interbank interest rates. It isn’t clear how much more wrapping up these
cases will cost.
Deutsche Bank
already has paid more than $9 billion in fines and legal settlements worldwide
since the start of 2008, according to data compiled by Bloomberg. That includes
settlements related to violations of US sanctions, rigging of interest-rate
benchmarks and allegations that it defrauded US-backed mortgage issuers Fannie
Mae and Freddie Mac.
Year of struggle
A slump in
earnings, negative interest rates and challenging markets have caused the bank
to continue to struggle this year. Cryan’s strategy, announced in October 2015,
called for cost cuts and the elimination of dividends for two years to preserve
capital. Deutsche Bank has said it may not be profitable in 2016 as it focuses
on moving past its legal battles.
At least four
other European banks remain under investigation over the role of their
mortgage-backed securities business: Credit Suisse Group, UBS Group, HSBC
Holdings and Royal Bank of Scotland Group. In addition to Bank of America, US
banks that have settled include Goldman Sachs Group, JPMorgan Chase & Co
and Morgan Stanley. Wells Fargo & Co and Moody’s have disclosed US
investigations into their mortgage-backed securities dealings and have said
they’re cooperating.
-With assistance from Tom Schoenberg, David
McLaughlin and Ruth Liew.
BLOOMBERG