Deutsche Bank AG is moving closer to settling one of its biggest legal cases. How it manages to pay will depend on whether it can persuade the U.S. to lower its initial request of $14 billion, and by how much.
The shares of Germany’s biggest bank plunged on news the Department of Justice is seeking an amount that’s more than twice the 5.5 billion euros ($6.1 billion) Deutsche Bank has set aside for litigation. Aside from the U.S. probe into residential mortgage-backed securities, the lender also faces inquiries into matters including currency manipulation, precious metals trading and billions of dollars in transfers out of Russia.
Reaching a mortgage deal would clear a major hurdle for Deutsche Bank, which has paid more than $9 billion in fines and settlements since the start of 2008, according to data compiled by Bloomberg. Still, JPMorgan Chase & Co. analysts said any agreement exceeding $4 billion would raise questions about Deutsche Bank’s capital position.
“Deutsche Bank is going to be looking at other options it has,” Chris Wheeler, an analyst at Atlantic Equities, told Francine Lacqua on Bloomberg Television. “Maybe selling some of the assets it doesn’t want to sell, or maybe it can find further investors.”
The stock fell 8.5 percent in Frankfurt trading, erasing 1.5 billion euros in market capitalization. The bank’s 1.75 billion euros of 6 percent additional Tier 1 bonds, the first notes that would take losses, fell 5 cents to 78 cents on the euro, the biggest drop since the U.K. voted to leave the European Union.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the company said in a statement early Friday in Frankfurt. “The negotiations are only just beginning.”
JPMorgan analysts wrote in a note to clients that a settlement range of $3 billion to $3.5 billion would leave the German lender room to settle other legal issues. Any additional $1 billion in litigation charges would erode 24 basis points in capital, according to the note. Analysts at Credit Suisse Group AG said that Deutsche Bank may have to take another 3.8 billion euros in provisions in the medium term.
Deutsche Bank was among the worst-capitalized lenders in European stress tests earlier this year. Chief Executive Officer John Cryan, who took over last year, already suspended the dividend to preserve capital and has repeatedly ruled out tapping investors. The bank’s common equity Tier 1 ratio, a measure of financial strength, was set to edge higher in the second half from 10.8 percent at the end of June, helped by asset sales, Cryan said when the company published first-half results.
The German lender may be forced to sell large parts of its asset management business, including the U.S. unit, or potentially raise equity if the DOJ fine exceeds about $7 billion, according to bankers with knowledge of the firm. Deutsche Bank has raised 31.7 billion euros through three capital increases since the global financial crisis erupted.
Cryan said on Sept. 12 that asset management was an “essential part” of the company.
The bank confirmed that it had started negotiations with the Justice Department to settle civil claims the U.S. may consider over the bank’s issuing and underwriting of residential mortgage-backed securities from 2005 to 2007.
“The indicative penalty for Deutsche Bank of $14 billion is totally unrealistic,” said Hans Ulrich Jost, a fund manager at GAM Holding AG, which owns the lender’s shares. “This is just the opening bid and the beginning of lengthy negotiations likely to settle at a more realistic level of some $3 billion to $5 billion, which would be consistent with the banks that have already settled.”
Bank of America Corp. paid $17 billion to reach a settlement in a similar case in 2014, the biggest such accord to date. Goldman Sachs Group Inc. agreed to a $5.1 billion settlement with the U.S. earlier this year, including a $2.4 billion civil penalty and $875 million in cash payments, to resolve U.S. 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.
Justice Department spokesman Peter Carr declined to comment on the negotiations.
“In defense of protecting its shareholders’ money, Cryan is well within his rights in negotiating a more equitable and just settlement with the U.S. government, and calling this one a punishment that’s several orders of magnitude greater than the crime,” said Tony Plath, a finance professor at the University of North Carolina. Plath expects a final settlement of about $4 billion to $5 billion.