Deutsche Bank shares hit by $14 billion US claim
German lander hopes to lower cost in negotiations with Justice Department
Shares in Deutsche Bank slumped this morning after it received a $14 billion claim from the US Justice Department to settle an investigation into the firm’s sale of residential mortgage-backed securities. The German lender has said, however, that it is not willing to pay that amount.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the company said in a statement this morning. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
Deutsche Bank chief executive John Cryan has struggled to boost profitability as unresolved legal probes and claims compound concerns that the lender will be forced to raise capital or sell assets. Reaching a mortgage deal would clear a major hurdle for the bank, which has paid more than $9 billion in fines and settlements since the start of 2008, according to data compiled by Bloomberg.
Deutsche Bank shares dropped as much as 8.2 per cent and were down 6.8 per cent to €12.22 just after 9.30am in Frankfurt. Other European lenders probed in relation to residential mortgage-backed securities, such as UBS and Credit Suisse, also declined.
Germany’s largest lender confirmed that it had started negotiations with the Justice Department to settle civil claims the US may consider over the bank’s issuing and underwriting of residential mortgage-backed securities from 2005 to 2007. The Wall Street Journal reported the $14 billion claim on Thursday.
Bank of America paid $17 billion to reach a settlement in a similar case in 2014, the biggest such deal to date.Goldman Sachs agreed to a $5.1 billion settlement with the US earlier this year, including a $2.4 billion civil penalty and $875m in cash payments, to resolve US allegations that it failed to properly vet mortgage-backed securities before selling them to investors as high-quality debt. The settlement included an admission of wrongdoing.
The Justice Department, in concluding previous investigations into the sale of mortgage-backed securities that soured during the financial crisis, typically has presented initial penalties higher than what banks ultimately paid, people familiar with those negotiations have said. The sides may negotiate over the final tab, as well as what conduct the bank will acknowledge and whether individuals will be sanctioned.
JPMorgan Chase analysts wrote in a note to clients yesterday that a settlement of about $2.4 billion “would be taken very positively,” and that an agreement exceeding $4 billion would pose questions about Deutsche Bank’s capital positions and force it to “build additional litigation reserves.”
Cryan has said that he aims to settle major outstanding legal issues as soon as possibleas part of his wider overhaul. Deutsche Bank had €5.5 billion ($6.2 billion) set aside for settlements and fines at the end of June, with chief financial officer Marcus Schenck saying in July that the lender will probably face “material” litigation charges in the second half.
In addition to the US mortgage investigation, Deutsche Bank faces litigation and regulatory probes relating to issues such as foreign currency rate manipulation and precious metals trading. The German bank is a party to 47 civil actions concerning the setting of interbank lending benchmarks, according to its 2015 annual report published in March.
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