A $14 billion demand from America adds to the German lender’s troubles
Bills for pre-crisis buccaneering are still coming in. Deutsche Bank, Germany’s biggest lender, confirmed on September 15th that America’s Department of Justice (DoJ) had asked for $14 billion to settle possible claims connected with the underwriting and sale of residential mortgage-backed securities (RMBSs) between 2005 and 2007. The next day Deutsche’s share price, already reeling after a wretched year, plunged by 8%. It was groggier still after the weekend, closing on September 20th at a 30-year low (see chart).
American banks have settled with the DoJ for amounts between $3.2 billion (Morgan Stanley) and $16.7 billion (Bank of America), as well as agreeing on smaller sums with the Federal Housing Finance Agency (FHFA), another regulator. Deutsche, which settled with the FHFA for $1.9 billion in 2013, insists that it will not pay anything near to what the DoJ has asked for, and it surely won’t. Citigroup, which reached an RMBS deal with the department in 2014, reportedly haggled its way from $12 billion to $7 billion.
Even so, Deutsche can ill afford a hefty bill. In 2015 it lost €6.8 billion ($7.4 billion). John Cryan, the chief executive for the past 14 months, scrapped the dividend and has told shareholders to expect nothing (and no profits) in 2016. After the shares’ latest tumble, Deutsche trades at around a quarter of the net book value of its assets. The price of five-year credit-default swaps (a form of insurance against default) on its senior debt is well above that paid by Europe’s other leading banks. Data released this week by America’s Federal Deposit Insurance Corporation on capital-asset ratios suggested that Deutsche’s status as the riskiest of a score of big banks is worsening.
Deutsche’s ratio of equity to risk-weighted assets, an important measure of a bank’s resilience, was 10.8% at the end of June, weaker than its peers’. Mr Cryan intends to raise it to 12.5% by 2018. With risk-weighted assets of around €400 billion, that 1.7% gap works out at nearly €7 billion.
The disposal of Deutsche’s stake in Hua Xia, a Chinese bank, is expected to make up around 0.5 points of that gap. The sale of Postbank, a German retail business, though put off for the time being, should eventually fill a bit more of the hole. So will cost cuts and the ditching of other, “non-core” assets. (Changes to international bank-capital rules, which will increase risk-weighted assets by giving extra emphasis to operational risk, will push in the other direction.) A big fine will make it harder to close up the rest without asking investors for more capital.
The bank has already set aside €5.5 billion for litigation expenses. However, that covers not only the RMBS claims but also the potential cost of investigations by American and British authorities into whether lax controls at Deutsche allowed money-launderers to whisk cash out of Russia. Every extra euro of penalties, on either count, will take Mr Cryan further away from his equity-ratio goal.
Analysts had reckoned that Deutsche might pay $3 billion or so—around the bottom of the American banks’ range of penalties—from its litigation pot for RMBSs. Now the market guesses, from the scant evidence of the DoJ’s demand, that the price may be twice that, or more; uncertainty about the outcome is adding to the jitters.
Other European banks—Barclays, Credit Suisse, HSBC, the Royal Bank of Scotland (RBS) and UBS—are also in the DoJ’s sights. Shares in Credit Suisse and RBS shuddered most after the DoJ’s demand to Deutsche, falling by 4% or so. The Swiss lender has provided SFr1.6 billion ($1.6 billion) for legal costs of all sorts. RBS has set aside £7.5 billion ($9.7 billion), but this does not include possible RMBS penalties. (Among the state-owned British bank’s woes are the mis-selling of insurance and a shareholder lawsuit over a rights issue in 2008, months before calamity struck.) But if estimating Deutsche’s bill is brave, taking a stab at the rest is downright foolhardy.
Recently rumours have swirled that Deutsche might merge with its domestic rival, Commerzbank, or sell its asset-management arm to raise cash. Mr Cryan has told his staff not to “become distracted by speculation about alleged mergers or sales plans.” The boss continued: “We have enough on our plate to solve on our own.” Indeed they do.
Source: The Economist
