(Open): The market opened lower, with bank shares hit after Deutsche Bank said it faced a $14bn penalty to settle a probe by U.S. regulators into the selling of mortgage-backed securities.
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European stock markets retreated on Friday, as banking shares led by Deutsche Bank slumped on news United States authorities were hunting down Germany’s biggest lender over a record fine.
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.
Allegedly, Justice has proposed that the company pay $14 billion in order to settle a series of investigations into how it misled investors about the quality and safety of mortgage-backed securities it sold prior to last decade’s financial crisis. Other banks which settled recently include Bank of America, Citigroup and JP Morgan.
Those talks are attempting to settle civil claims that involves Deutsche Bank’s activities in residential mortgage-backed securities (RMBS) between 2005 and 2007.
Deutsche Bank released a statement saying: “The negotiations are only just beginning”.
In 2014, USA bank Citigroup settled a probe into mortgage-backed securities for $7bn (£5bn) while in a similar case this year, Goldman Sachs agreed to pay $5bn (£4bn).
We rate DEUTSCHE BANK AG as a Sell with a ratings score of D. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more hard for investors to achieve positive results compared to most of the stocks we cover.
Other big banks have also settled with the U.S. over involvement in MBS trade which led to the financial crises of 2008.
Some observers are also concerned that Deutsche Bank may need to raise funds, potentially through a capital increase, to finance the settlement.
On the floor of the Frankfurt stock exchange, analyst Robert Halver with Baader Bank said: “Deutsche Bank can’t pay $14 billion”. Privately, Deutsche Bank lawyers have suggested that the bank views between $2 billion and $3 billion as a reasonable cost to close out the Justice Department’s mortgage-related probe quickly, according to people familiar with internal bank discussions and signals communicated to investors.
Deutsche Bank made a scant 20-million euro profit in the second quarter despite 7.4 billion euros ($8.3 billion) in net revenue. “Those will still burden the bank for many years to come”, he said.
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As he fights legal challenges on multiple fronts, Cryan has also vowed to press through an ambitious restructuring of the lender, slashing 200 branches in Germany alone and 9,000 jobs worldwide.
