Deutsche Bank balks at DoJ´s proposed $14bn settlement

Germany´s largest lender, Deutsche Bank, balked at the $14bn payment proposed by the US Departmemt of Justice to settle an investigation into the lender´s sale of residential mortgage-backed securities in the years immediately before the start of the financial crisis.

“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited.

“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,” the company said in a statement.

US regulators´ proposed settlement was more than three times what some analysts had estimated even under a worst-case scenario.

Since 2008, Deutsche Bank had already paid out over $9bn in fines and settlements.

As of the end of June, the German lender had set aside €6.2bn in litigation reserves, according to JP Morgan, but was facing litigation on several other fronts, including for the alleged manipulation of interbank interest rates.

"We believe a $2.4bn range settlement would be taken very positively by the market while a settlement in $3-3.5bn range would be inline with our litigation estimates as it then leaves room to settle other issues within the litigation reserves. However a settlement above $4bn would put questions around capital position with the need to potentially build additional litigation reserves for e.g. the Russian issue where the range of fines is also uncertain in the $1-4bn range.

"We see capital as key with any material charge creating capital at risk potentially leading to similar concerns we saw in early 2016," analysts at JP Morgan said in a research note sent to clients on 15 September.

In the same report, JP Morgan pointed out RBS´s disclosure that its own balance sheet provisions did not include potential penalties and fines levied by the DoJ.

"The long-term theme of low return-on-equity in Eurobank investment banks continues with investment banks unable to illustrate cost cutting as well as the addition of EU Passporting uncertainty, which we believe the market is underestimating. We continue to prefer US IBs Goldman Sachs and Morgan Stanley with better capital and leverage positions and which have already reached a settlement on thi issue and buying back stock."

"RBS could have to pay up to $13bn to settle the claims. Even a third of this figure which deliver a crippling blow to the lender, making its return to profitability even further off. It would also derail plans to return the bank to private ownership any time soon.

"After its latest loss, RBS has notched up £50bn in losses since the financial crisis – more than the £45bn stumped up by taxpayers to save the bank," said ETX Capital Market Analyst Neil Wilson.

As of 0809 BST shares in Deutsche Bank were falling 7.79%.