Shares of Deutsche Bank (XETRA: DBK-DE) were trading 8 percent lower – making it the worst performer on the Stoxx 600 index (STOXX:.STOXX) – after the U.S. Department of Justice asked the German lender to pay $14 billion to settle allegations of mis-selling mortgage securities.
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The US Department of Justice is asking Deutsche Bank to pay $14bn (£10.6bn) to settle an investigation into mortgage-backed securities, the bank has said.
USA and European stocks were moderately lower in early trading Friday after Deutsche Bank said it wouldn’t settle with the Department of Justice over its role in the 2008 financial crisis.
The claim linked to MBS, which links back to the 2008 financial crises, is perhaps the toughest lawsuit which the bank is facing right now.
The “number is almost fourfold higher what analysts were anticipating”, said Naeem Aslam, chief market analyst at Think Markets UK, in a note. “There’s going to be an terrible lot of management time spent on it to get to a sensible number”. Still, the figure seemed to be much more than Deutsche Bank expected.
Although the USA mortgage investigation is gaining most attention, Germany’s largest bank is battling against many other probes relating to activities in Russian Federation and trading issues such as foreign-currency rate manipulation and precious metals trades.
Federal Reserve: Investors are looking ahead to the Federal Reserve’s two-day policy meeting next week where the US central bank will determine whether or not to raise interest rates this month.
ANALYST TAKE: Mike van Dulken, Head of Research at Accendo Markets, said a retreat in bank shares was partly to blame for the soft performance in Europe. Deutsche Bank hasn’t said what it has set aside in anticipation of a settlement.
American banks have settled with the department for amounts between $3.2 billion (Morgan Stanley) and $16.7 billion (Bank of America), as well as paying smaller sums to the Federal Housing Finance Agency (FHFA), another regulator.
The CBOE Market Volatility index .VIX , Wall Street’s “fear gauge”, declined 5.7 percent.
According to analysts, even a fine at a fraction of that amount would threaten Deutsche Bank’s capital position.
Deutsche Bank’s settlement will comprise a different list of recipients from the Goldman case, a source close to the matter said, adding that the lender had already settled some claims three years ago. The settlement included an admission of wrongdoing. The sides may negotiate over the final tab, as well as what conduct the bank will acknowledge and whether individuals will be sanctioned. Last week, a German magazine published an unconfirmed report that bank would be willing to enter a $2.4 billion agreement.
Said Dr Tony Plath, a finance professor at the University of North Carolina: “In defence of protecting its shareholders’ money, Mr 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”.
Deutsche Bank made a scant 20-million euro profit in the second quarter despite 7.4 billion euros ($8.3 billion) in net revenue.
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The bank’s shares suffered sharp losses in trading in Frankfurt on Friday, dropping almost 7.3 per cent by around 1045 GMT to stand at 12.15 euros. “But because of the election campaign it may end up higher – at maybe 6 or 7 billion”.
